Covid-19 has resulted in an unprecedented US monetary and fiscal response, with a full crisis toolkit deployed in just over a month. The bounds on US fiscal and monetary policy have been removed, and the boundaries between US fiscal and monetary authority blurred.

We focus on the short-term costs of this incredible policy stimulus and expect:

• US T-bill stock is forecast to rise by $1.1trn, with the majority of issuance front-loaded to Q2. As the shock-absorber, T-bill issuance is being used to finance immediate Treasury cash needs, given the abruptness and depth of the economic shock.
• US Treasury coupon bond supply to rise materially to $300bn in monthly auctions, from $225bn/month in 2019. We forecast net supply to rise by 60% towards $1trn (excluding the impact of Fed QE).
• May’s refunding announcement will illustrate the size of the funding challenge, with auction increases likely across the US Treasury curve. The new 20y UST Treasury will be launched – we include size and fair value considerations.

• The next phase of Fed balance sheet expansion will likely see a shift from conventional QE (USTs + MBS) to ‘targeted QE’. This includes credit easing (primary + secondary credit purchases, CPPF), easing for the wider economy (main street and municipalities) and continued liquidity easing (CB swap lines, MMLF, PDCF, TALF). The Fed may signal its intent at April’s FOMC meeting, with the possibility of improved terms and accessibility for liquidity or credit support mechanisms to encourage greater use.
• The Fed balance sheet could rise to $10trn in 2020 with asset expansion in targeted QE. The shift towards increased ‘public’ sponsorship of private assets and reduction in conventional QE via USTs (and MBS) should affect semantics in US Treasury market.
• We project further UST and MBS purchases of $860bn and $550bn, respectively, over the remainder of the year under a gradual tapering subject to market conditions. QE4 will continue to reduce the net supply to the market, but flow dynamics show the demand/supply (QE/issuance) balance is deteriorating, as we expect the Fed to buy fewer USTs over the next eight months than in March and April.
• The belly (5-10y) of the curve could be most exposed to a cheapening, with a high concentration of supply and low proportion of shrinking Fed purchases. Hence, we continue to expect the 10y to cheapen in 5s10s30s UST fly, and 5y USTs to underperform Libor swaps, taking 5y swaps spreads negative again.