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FAQs: Purchases of Longer-term Treasury Securities
The following frequently asked questions (FAQs) provide further information about the Federal Reserve's additional asset purchases of agency mortgage-backed securities (MBS) and the reinvestment of principal payments from agency securities.
Effective December 12, 2012
Why is the Desk purchasing longer-dated Treasury securities?
On December 12, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase longer-term Treasury securities after the maturity extension program is completed at the end of December 2012, initially at a pace of about $45 billion per month. The FOMC also directed the Desk to continue purchasing additional agency mortgage-backed securities (MBS) at a pace of about $40 billion per month. These actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The FOMC also directed the Desk to maintain its existing policy of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS, and, in January, to resume rolling over maturing Treasury securities into new issues at auction.
What Treasury securities will the Desk purchase?
The Desk will purchase securities that, as of the date of each purchase operation, have remaining maturities of 4 years to 30 years. It will distribute purchases across seven sectors based on the approximate weights below:
Nominal Coupon Securities by Maturity Range*
4 - 4¾
4¾ - 5¾
5¾ - 7
7 - 10
10 - 20
20 - 30
4 - 30
*The on-the-run 7-year note will be considered part of the 5¾ to 7-year sector, and the on-the-run 10-year note will be considered part of the 7- to 10-year sector.
**TIPS weights are based on unadjusted par amounts.
Under this distribution, the Desk anticipates that the Treasury securities purchased will have an average duration of approximately 9 years. The distribution of purchases could change if market conditions warrant.
The Desk will continue to refrain from purchasing securities that are trading with heightened scarcity value in the repo market for specific collateral or that are cheapest to deliver into active Treasury futures contracts. Specific issues that will be excluded from consideration will be announced at the start of each operation. Currently, the Desk does not plan to purchase STRIPS or securities trading in the when-issued market.
Will the Desk complete Maturity Extension Program (MEP) purchases and sales?
Yes, the FOMC directed the Desk to complete the purchases of longer-dated Treasuries and sales and redemptions of shorter-dated Treasuries associated with the MEP by the end of December 2012. The tentative calendar of December MEP operations published on November 30 will remain in place through the end of the month. The first calendar of operations associated with the new Treasury security purchase program will be published on December 31, 2012, and will cover January 2013.
How will the Desk manage the System Open Market Account’s (SOMA’s) maturing Treasury securities?
As directed by the FOMC, the Desk is reinstituting its prior policy of rolling over maturing Treasury securities at auction starting in January 2013. However, for operational efficiency, when the proceeds received by the SOMA from Treasury securities that mature on a given day total less than $2 million, the Desk will allow those securities to mature without reinvestment.
For example, if on a given date the SOMA holds two Treasury coupon securities maturing with balances of $0.5 million and $1.1 million, the full $1.6 million would be allowed to mature without reinvestment. However, if the balances of the maturing securities on that date were instead $0.5 million and $1.6 million, the full $2.1 million would be reinvested into newly issued Treasury coupon securities at auction.
How will the Desk purchase securities in the open market?
Consistent with prior practices, the Desk will conduct its purchases through a competitive auction process that aims to accomplish the desired program at the lowest cost, while also seeking to avoid disrupting orderly market functioning.
How much will the Desk purchase each month in Treasury securities and how will this be communicated?
Monthly purchases will total about $45 billion in par value. On or around the last business day of each month, the Desk will publish a tentative schedule of operations expected to take place over the following calendar month. The dates and amounts published are subject to change should the FOMC alter its directive to the Desk during the month or if market conditions warrant.
How would a change in the FOMC directive be reflected in the Desk’s published schedule?
Schedules published by the Desk are based on already announced FOMC decisions, and make no assumptions about future policy actions. Accordingly, if the FOMC announced a modification to its policy stance with a new policy directive, the Desk would release an updated schedule of operations for the remainder of the month.
What is the maximum amount the Desk will purchase in each issue?
To provide operational flexibility and to ensure that it is able to purchase the most attractive securities on a relative-value basis, SOMA holdings of an individual security will be allowed to rise above the 35 percent threshold only in modest increments, as specified in the table below. Subject to market conditions, the Desk may further limit the size of additional purchases in certain issues or otherwise change the stated limits as needed.
SOMA Security Ownership Prior to Operation as a Percentage of Outstanding Issuance
Maximum Purchase Amount per Security in Operation is the Lesser of:
(35% of Outstanding Issuance) minus SOMA Holdings
5% of Outstanding Issuance
(50% of Outstanding Issuance) minus SOMA Holdings
2.5% of Outstanding Issuance
(60% of Outstanding Issuance) minus SOMA Holdings
1% of Outstanding Issuance
(70% of Outstanding Issuance) minus SOMA Holdings
Not Eligible for Purchase
How will the Desk adjust for any unexpected deviations between anticipated and actual Treasury purchases over a given monthly period?
An adjustment for any deviation will be made by modifying the following month’s Treasury purchases. For example, if actual Treasury purchases were $1 billion smaller (larger) than previously announced, the Desk would increase (decrease) the following month’s anticipated Treasury purchases by $1 billion.
Will the Federal Reserve lend the Treasury securities it purchases through this program?
Yes, Treasury securities purchased through this program will be available to borrow through the SOMA’s securities lending facility.
Who is eligible to transact with the Federal Reserve under this program?
The Federal Reserve Bank of New York’s primary dealers are eligible to transact directly with the Federal Reserve. Dealers are expected to submit offers both for themselves and their customers.
How will the purchases be conducted?
Consistent with its prior outright purchases of Treasury securities, the Desk will arrange these purchases with the Federal Reserve Bank of New York’s primary dealers through a series of multiple-price competitive auctions using the Desk’s FedTrade system. Primary dealers will be able to submit a fixed number of offers on a range of eligible securities. Offers will be evaluated based on their proximity to prevailing market prices at the close of the auction as well as on measures of relative value. Relative value measures are calculated using the Federal Reserve Bank of New York’s proprietary model.
How often will the Desk conduct operations to purchase Treasuries?
Each month, the Desk anticipates conducting approximately 17 operations to purchase nominal securities and one operation to purchase TIPS. The initial frequency of purchase operations by sector is listed in the table below:
Frequency of Monthly Operations
Nominal Coupon Securities
4 - 4¾ years
4¾ - 5¾ years
5¾ - 7 years
7 - 10 years
10 - 20 years
20 - 30 years
4 - 30 years
What is the minimum amount for which a dealer may submit offers?
The minimum offer size is $1 million, with a minimum increment of $1 million.
How many offers can a dealer submit during a purchase operation?
Dealers can submit nine offers per issue, which should facilitate both dealer and dealer client participation.
How will the Desk communicate the operation results?
Operation results will be posted on the Federal Reserve Bank of New York website following each operation. The information posted will include the total amount of propositions received, total amount of propositions accepted, and the amount purchased per issue. In addition, participating dealers will receive the operation results, including their accepted propositions, via FedTrade.
Will the Desk release operation pricing results?
Yes, the Desk will continue to publish information on transaction prices in individual operations at the end of each scheduled period, coinciding with the release of the next period’s schedule. For each security purchased in each operation, the Desk will release the weighted-average accepted price, the highest accepted price, and the proportion accepted of each proposition submitted at the highest accepted price.
In addition to the pricing information released each month, Section 1103 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires that detailed operational results, including counterparty names, be released two years after each quarterly transaction period.
Whom should dealers call if they experience difficulties during the operation?
Primary dealers may call the Federal Reserve Bank of New York Trading Desk with submission and verification questions. For system related problems, dealers may call the Federal Reserve Bank of New York Primary Dealer Support.
When and how does Treasury security settlement take place?
Treasury security settlement will typically occur on a T+1 basis, i.e. one business day after the day of the operation, via the Fedwire Securities System.