Filling UST Void Would Require Rates 120 BPs Higher Or Stocks 30% Lower: BAML

Bank of America Merrill Lynch is predicting an equity-rate convergence trade because of what it calls a trifecta of increasing U.S. treasury supply, declining demand and the need for pension and mutual funds to step up.

At the heart of the bank’s call is increased Treasury supply over the next five years – anywhere between $3 trillion and $4.5 trillion. “There are few things more certain right now than increased Treasury supply,” it asserted in its U.S. Rates Viewpoint newsletter.

But unlike prior cycles, traditional and price insensitive sources of demand – reserves, domestic banks and Federal Reserve – cannot absorb the substantial increase in supply of UST. This means the duty of absorbing the increased supply will rest on...