The Fed Re-enters Treasuries

- Flying too High: "We recommend selling 5yr Treasuries versus 2yr and 10yr Treasuries. Recent strong performance is beyond what is justified by Fed actions."
- Fed Treasury purchases will have an average duration of 6 years: "The Fed is likely to distribute Treasury purchases across maturities similar to what it did in 2009 with a slightly longer duration. The SOMA 35% limits should not be a binding constraint."
- Buy Vol: "Buy 5y10y swaption straddles to express the view that vol is cheap."
- Treasury Auctions were Strong: "All three auctions this week had a Citi Strength Indicator of greater than 50%."
- Flow: "Strong demand for the US fixed income in the week before the FOMC statement. Duration is still being extended."
- Unbalanced market re-pricing of MBS refi spike risk: "although a low probability in our view, a government engineered refi spike should bring with it a surge of production in MBS; in this scenario production coupon MBS spreads should widen."
- Agency Debt: "GSE reform hearings commence on August 17th and despite an additional two sessions after that we expect only modest spread volatility. The continued decline in agency debt supply should help to offset spread widening."
- US Rate Strategy Model Portfolio: "The portfolio is up 0.1% month-to-date."

Citigroup US Rate MBS Strategy 20100813

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