Effective November 3, 2010
Why is the Desk purchasing longer-term Treasury securities?
Purchases are being conducted in connection with a directive from the Federal Open Market Committee (FOMC) to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, and to continue to reinvest principal payments from agency debt and agency mortgage-backed securities (MBS) holdings into longer-term Treasury securities. Together, these purchases are anticipated to bring total SOMA holdings of domestic securities to about $2.654 trillion by the end of the second quarter of 2011.
What Treasury securities will the Desk purchase?
Beginning with the operations included in the November 10 schedule, the Desk plans to distribute purchases across the following eight maturity sectors based on the approximate weights below:
*The on-the-run 7-year note will be considered part of the 5½- to 7-year sector, and the on-the-run 10-year note will be considered part of the 7- to 10-year sector.
Nominal Coupon Securities by Maturity Range*
**TIPS weights are based on unadjusted par amounts.
Under this distribution, the Desk anticipates that the assets purchased will have an average duration of between 5 and 6 years. The distribution of purchases could change if market conditions warrant, but such changes would be designed to not significantly alter the average duration of the assets purchased.
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 the front-month 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 Treasury bills, STRIPS, or securities trading in the when-issued market.
Has the Federal Reserve changed its 35 percent per-issue holding limit?
Yes, to provide operational flexibility and to ensure that it is able to purchase the most attractive securities on a relative-value basis, effective November 10, the Desk is temporarily relaxing the 35 percent per-issue limit on System Open Market Account (SOMA) holdings under which it has been operating. However, SOMA holdings of an individual security will be allowed to rise above the 35 percent threshold only in modest increments.
Specifically, once the SOMA’s holdings of a security reach 30 percent of the outstanding amount, additional purchases of the given security will generally be capped at 5 percent of the total outstanding issue size in each subsequent operation. Subject to market conditions, the Desk may further limit the size of additional purchases of these issues.
How much will the Desk purchase each month in Treasury securities and how will this be communicated?
- Example: If the SOMA holds $3.2 billion of a $10 billion issue ($3.2 billion held by the SOMA, $6.8 billion held by others), given that the SOMA’s 32 percent holdings exceed 30 percent of the total outstanding issue size, purchases in each subsequent operation would be limited to $500 million or less, depending on market conditions.
On or around the eighth business day of each month, the Desk will publish an anticipated amount of purchases expected to take place between the middle of the current month and the middle of the following month. This number is subject to change, should the FOMC choose to alter its guidance to the Desk during the monthly period or if market conditions warrant. This amount will be determined by:
- the amount of the $600 billion in announced purchases that are planned to be completed over the coming monthly period, and
- the sum of the approximate amount of principal payments from agency MBS expected to be received over the monthly period, and the amount of agency debt maturing between the seventh business day of the current month and the sixth business day of the following month.
This announcement will also include a schedule of anticipated Treasury purchase operations, including operation dates, settlement dates, security types to be purchased (nominal coupons or TIPS), the maturity date range of eligible issues, and an expected range for the size of each operation.
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.
Will purchases of longer-term Treasuries representing the reinvestment of principal payments from agency debt and agency MBS be managed separately from the additional longer-term Treasury purchases in any way?
No, from an operational perspective, the Desk will conduct all purchases as one consolidated purchase program.
How will the Desk adjust for any unexpected deviations between anticipated and actual longer-term 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 these purchases impact the existing policy for reinvesting the proceeds from maturing Treasury securities held in the SOMA?
No, the Desk’s existing Treasury reinvestment policy of reinvesting the proceeds from maturing Treasury securities in Treasury auctions will not be altered.
Who is eligible to sell Treasury securities to 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 encouraged to submit offers both for themselves and their customers.
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 SOMA’s securities lending facility.
Will purchases be adjusted for the effect of inflation on the original face value of TIPS securities held in the SOMA?
Inflation compensation for the SOMA’s holdings of TIPS securities results in an increase in outright holdings of domestic securities. Accordingly, the total amount of purchases of longer-term Treasury securities conducted in association with the reinvestment of principal payments from agency debt and agency MBS will be reduced over time by the amount of inflation accrual.
How will the purchases be conducted?
Consistent with its prior outright purchases of Treasury securities, the Desk will arrange these purchases with primary dealers through a series of multiple-price competitive auctions using the Desk’s FedTrade system.
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 offers received, total amount of offers 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 begin to publish information on prices paid in individual operations at the end of each scheduled period, coinciding with the release of the next period’s schedule. The Desk plans to publish the first pricing information on December 10, 2010, which will cover the operations included in the November 10, 2010 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.
How often will the Desk conduct operations to purchase longer-term Treasuries?
The Desk will conduct one operation per day on most business days, but will occasionally conduct either no operations or multiple operations.
How many offers can a dealer submit during an operation?
Beginning with the first operation associated with the November 10 schedule, dealers will be limited to nine offers per issue. This represents an increase from the prior limit of five offers per issue to facilitate greater participation by customers through dealer counterparties.
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.
Whom do 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 Federal Reserve Bank of New York Primary Dealer Support.
When and how does Treasury security settlement take place?
Treasury security settlement will occur on a T+1 basis, i.e. one business day after the day of the operation, via the Fedwire Securities System.