The Fed's attempt at economic stimulus has fallen further into the future. Analysts said that the uncertainty is likely to bring an early summer slowdown in the fixed-income markets.
Bank of America Merrill Lynch analysts wrote in their latest securitization weekly report that the Federal Open Market Committee, which met this week, is unlikely to announce any significant changes to its economic outlook or policy as a result of the latest meeting.
This means that expectations for QE3 will be dragged further into the future. Analysts said there are likely to be another two more months of a low-realized-volatility-trading-range environment.
The Fed's latest stimulus measure called Operation Twist will conclude on June 30. It follows two prior rounds of quantitative easing. QE1 was launched at the height of the financial crisis on November 25, 2008 and was concluded on March 31, 2010. The second round of easing was launched on November 3, 2010 and ended on June 30, 2011.
"Spreads have generally shown an upward trend since the end of QE2 in June last year and spreads have been widening at a faster rate over the past month," said Wells Fargo analysts in their fixed-income report released today.
According to the bank, QE1 pulled credit spreads back from the widest levels seen since the Great Depression.
The analysts said that the 360 basis points of tightening after the stimulus measure provided some of the best-ever 12-month excess returns for corporate bonds.
QE2 led to 50 basis points tightening from the announcement to conclusion. Operation Twist has accomplished even less from a fixed-income spread perspective and has led to a tightening of 15 basis points from when the program was announced back in September 2011, Wells Fargo analysts explained.
On the CMBS and non-agency MBS side, the drop in the expected boost from QE3 asset purchases can potentially lead to wider spreads, explained the BofA Merrill analysts.
"It appears as if the most likely scenario is that both markets will be frustratingly range bound over at least the next two months," they said in their report. "The market may think it has insights into what the Fed will do and when, and push spreads to one end of the range, but there is a good chance those insights could be proven wrong in which case spreads would move back to the other end of the range."
