Effective June 20, 2012

Why is the Desk purchasing longer-dated Treasury securities and selling shorter-dated Treasury securities?
On September 21, 2011, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk at the Federal Reserve Bank of New York (the Desk) to purchase, by the end of June 2012, $400 billion in par value of Treasury securities with remaining maturities of 6 years to 30 years and to sell, over the same period, an equal par value of Treasury securities with remaining maturities of 3 years or less. 

On June 20, 2012, the FOMC directed the Desk to continue the maturity extension program through the end of 2012.  Specifically, the Desk was directed to purchase Treasury securities with remaining maturities of 6 years to 30 years and to sell or redeem an equal par value of Treasury securities with remaining maturities of approximately 3 years or less.

How does buying longer-dated Treasury securities and selling shorter-dated Treasury securities support a stronger economic recovery?
Changing the composition of the System Open Market Account’s (SOMA) Treasury holdings in this way removes duration from the portfolios of private investors.  By reducing the supply of duration in the market, this action should put downward pressure on longer-term interest rates relative to levels that would otherwise prevail.  The reduction in longer-term interest rates, in turn, will contribute to a broad easing in financial market conditions that will provide additional support to the economic recovery.

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 6 years to 30 years.  The Desk will distribute purchases across five sectors based on the approximate weights below:

*The on-the-run 10-year note will be considered part of the 8- to 10-year sector.
**TIPS weights are based on unadjusted par amounts. 

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.

What will be the effect of these actions on the average duration of the SOMA’s Treasury holdings?
The duration of the Treasury securities held in the SOMA portfolio will increase from approximately 5 years at the beginning of the maturity extension program in September 2011 to approximately 8 years by the end of December 2012.

How does the maturity extension program compare to the asset purchase program that ended in June 2011?
The long-term Treasury securities purchased under the maturity extension program are expected to have an average duration of about 10 to 11 years, while the securities sold or redeemed under the program are expected to have an average duration of about 1½ years. The effect of the roughly 9 years difference in duration for the $667 billion maturity extension program is expected to increase the average duration of the entire SOMA Treasury portfolio from 5 to about 8 years at the program’s conclusion. By comparison, the average duration of the $600 billion in securities purchased from November 2010 through June 2011 (often referred to as QE2) was about 5½ years. That program, which spread purchases across a wide range of maturities, left the average duration of the SOMA Treasury portfolio roughly unchanged at about 5 years.

Another measure, commonly known as "10-year equivalents," captures both the size of the programs and the average duration of the securities being bought and sold or redeemed. This measure is defined as the amount of 10-year Treasury securities that would have an equivalent amount of net duration exposure. By this measure, the maturity extension program is expected to remove roughly $700 billion in 10-year equivalents from the market by the end of 2012, whereas the round of Treasury purchases completed in June 2011 removed about $400 billion in 10-year equivalents from the market.

What Treasury securities will the Desk sell or redeem?
The Desk will sell nominal Treasury securities and TIPS with maturity dates of January 1, 2013, through January 31, 2016, and redeem all nominal Treasury securities (bills and coupons) and TIPS with maturity dates of July 1, 2012, through December 31, 2012.  Within the range of Treasuries being sold, the Desk will only sell securities with 3¼ years or less until maturity as of the date of each operation.  Following the completion of these sales and redemptions, the SOMA will hold almost no Treasury securities maturing through January 31, 2016.

Why is the Desk redeeming Treasury securities that mature in the second half of 2012 during the continuation of the maturity extension program?
Redeeming securities has a nearly identical effect as selling securities that are approaching maturity. The most operationally efficient way to implement the expanded program is to allow Treasury securities scheduled to mature before the end of the year to be redeemed without reinvestment, while selling securities that have a remaining maturity of approximately three years or less that will not mature before year end. Therefore, securities maturing after July 1 and on or before December 31, 2012, will be redeemed rather than sold. The reason that the Desk did not redeem securities in the first $400 billion installment of the maturity extension program is that the SOMA holdings of shorter-term Treasury securities were not being taken all the way to near zero during that installment.

At the end of the program, what will the composition of the SOMA Treasury portfolio imply for rollovers?
The scope for rollovers—that is, reinvesting the proceeds from maturing Treasury securities into new Treasury securities at auction—will be limited for a period of time after the completion of the program.  Nearly all Treasury securities maturing between January 2013 and January 2016 will be sold during the maturity extension program.  Thus, even if the FOMC were to reinstate the policy of rolling over Treasury holdings after the conclusion of the maturity extension program, those reinvestments would be near zero for the period through January 2016.

How will the Desk purchase and sell securities in the open market?
Consistent with prior practices, the Desk will conduct its purchases and sales through a competitive auction process that aims to accomplish the desired shift in holdings at the lowest cost, while also seeking to avoid disrupting orderly market functioning.

How much will the Desk purchase and sell or redeem each month in Treasury securities and how will this be communicated?
Monthly purchases will total approximately $44 billion in par value. Starting July 1, monthly sales will decline from a total of $44 billion to approximately $39 billion in par value, and on average, monthly redemptions will total approximately $5 billion.  Redemptions will vary from month to month depending on the level of maturing holdings, while sales will take place at a steady pace. The anticipated pace of transactions is as follows:

*Approximate; totals do not add due to rounding.

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 choose to alter its guidance to the Desk during the month or if market conditions warrant.

What is the maximum amount that the Desk will purchase in each issue?
The maximum amount that the Desk will purchase in each issue is 70 percent of the outstanding issuance of that security.  SOMA holdings of an individual security will be allowed to rise from 35 to 70 percent 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.

What is the maximum amount the Desk will sell of its Treasury holdingse?
Over the course of the program, the Desk will make available for sale the full amount of all nominal coupon and TIPS securities maturing between January 1, 2013, and January 31, 2016, up to a relatively small amount that will remain in the SOMA portfolio due to the $1 million minimum bid size in our operations.  That is, the amount available for sale will be the amount of the security held in the SOMA portfolio, rounded down to the nearest $1 million.

Will proceeds from Treasury sales directly offset the value of Treasuries purchased?
The FOMC directive involves purchasing and selling or redeeming Treasury securities in terms of par value.  Given the differences in prevailing market prices for shorter-term and longer-term Treasury securities, the value of securities purchased and sold or redeemed will likely differ to some degree.  Accordingly, these operations could lead to changes in the amount of reserves in the banking system, though such changes are likely to be moderate relative to the size of the program.

How much will the par value of domestic securities held in the SOMA vary as a result of this program?
The total par value of domestic securities held in the SOMA will remain broadly stable over time, but it may fluctuate modestly as purchases and sales or redemptions will not necessarily take place on the same day or in exactly the same size. The monthly pace of sales will remain fairly constant, while redemptions are driven by the amount maturing on each date, which will result in an uneven pace of redemptions over the program.

How will the Desk adjust for any unexpected deviations between anticipated and actual Treasury purchases or sales over a given monthly period?
An adjustment for any deviation will be made by modifying the following month’s Treasury purchases and sales. 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.

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 the Federal Reserve include the Treasury securities it purchases through this program in its securities lending facility?
Yes, Treasury securities purchased through this program will be available to borrow through the SOMA’s securities lending facility.

How will the SOMA’s securities lending facility be affected by sales and redemptions associated with this program?
Outright sales will reduce the SOMA’s holdings of a given security that are available for securities lending.  Additionally, the suspension of the reinvestment of maturing Treasury securities through December and the sale of nearly all securities maturing before January 2016 means that the SOMA will not acquire a meaningful amount of Treasury securities at auction through January 2016.  However, securities acquired via the purchases conducted in connection with the maturity extension program and all current holdings will continue to be available to borrow through the securities lending program.  At some point prior to each sale operation, the Desk may make the securities that are eligible for sale unavailable for lending to help ensure that the sales are able to be settled in a timely manner.

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 will the sales be conducted? 
The Desk will arrange sales 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.  Each operation will involve a range of eligible securities, and primary dealers will be able to bid for available holdings in the securities selected for sale.  Bids will be evaluated largely on their proximity to prevailing market prices at the close of the auction.  Unlike purchase operations, bids will not be evaluated based on measures of relative value.

How often will the Desk conduct operations to purchase and sell Treasuries?
In general, the Desk will aim to conduct 15 purchase and 5 sale operations per month during the program.  The Desk will conduct one operation per day on most business days, but will occasionally conduct either no operations or multiple operations.

Purchase Operations

Each month, the Desk anticipates conducting approximately 14 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:

Sale Operations

Each month, the Desk anticipates conducting approximately 5 operations to sell nominal Treasury securities that mature within 3 ¼ years, but no later than January 31, 2016.  As the SOMA only holds approximately $1 billion of TIPS that mature between January 1, 2013 and January 31, 2016, the Desk will conduct only one TIPS sale in the second half of 2012.  The Desk plans to divide the SOMA’s nominal Treasury holdings into 5 maturity ranges, each of which will include roughly one-fifth of SOMA holdings eligible for sale in a given month.  The Desk plans to sell between $7 billion and $8 billion in par value in each nominal operation and approximately $1 billion in par value in the single TIPS operation.

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 bids and offers for themselves and their customers.

How many offers or bids can a dealer submit during a purchase or sales operation?
Dealers can submit nine offers or bids per issue, which should facilitate the participation of both dealers and their customers.

What is the minimum amount for which a dealer may submit bids or offers?
The minimum bid or offer size is $1 million, with a minimum increment of $1 million.

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.

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 Federal Reserve Bank of New York Primary Dealer Support.

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 sold or 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.  For each security sold in each operation, the Desk will release the weighted-average accepted price, the lowest accepted price, and the proportion accepted of each proposition submitted at the lowest accepted price.

FAQS: January 31, 2012 »