FAQs: Maturity Extension Program
Effective January 31, 2012

General
 

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.

This policy step should put downward pressure on long-term interest rates and help make financial conditions more accommodative. In doing so, this action will support a stronger economic recovery and help ensure that inflation over time is at levels consistent with the Federal Reserve’s mandate to foster maximum employment and price stability.

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 while leaving the overall size of the SOMA’s balance sheet unchanged. By reducing the supply of longer term securities 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 stimulus to support the economic recovery.

To the extent markets were expecting this decision, some or all of the easing of financial conditions may have taken place prior to the official policy announcement and to the commencement of operations. Moreover, once the economic outlook improves, longer term interest rates will naturally increase.

Additional information on the effects of the program can be found at http://www.federalreserve.gov/monetarypolicy/maturityextensionprogram.htm 

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:


Purchase Distribution

Nominal Coupon Securities by Maturity Range*

TIPS**

6 to 8 Years

8 to 10 Years

10 to 20 Years

20 to 30 Years

6 to 30 Years

32%

32%

4%

29%

3%

*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.
 

This distribution is more heavily weighted towards longer-term securities than recent Federal Reserve asset purchase programs, as the program is intended to increase the average maturity of the SOMA’s securities holdings.

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 is expected to increase from approximately 5 years to 7 years by the end of the program.

How does the maturity extension program compare to the round of asset purchases that was completed in June 2011 in terms of its expected effects on the duration of the SOMA portfolio?
The long-term Treasury securities purchased under the maturity extension program will have an average duration of about 10 to 11 years, while the securities sold under the program will have an average duration of about 1 year. The net effect of the 9 to 10 years in duration from the $400 billion maturity extension program is expected to increase the average duration of the entire SOMA Treasury portfolio from 5 years to 7 years. For comparison, the average duration of $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 of the effects of these programs that captures both the size of the programs and the effects on average duration focuses on the dollar amount of duration risk removed from the market. This measure is defined as the amount of 10-year Treasury securities that would have an equivalent amount of dollar duration risk and is commonly referred to as “10-year equivalents.” By this measure, the maturity extension program is expected to remove roughly $400 billion in 10-year equivalents from the market. The round of Treasury purchases completed in June of 2011 was less heavily concentrated in long-term securities than the maturity extension program. As a result, this earlier program also removed about $400 billion in ten-year equivalents even though the nominal size of the program, at $600 billion, was larger than the maturity extension program.

What Treasury securities will the Desk sell?
The Desk will sell nominal Treasury securities and TIPS that, as of the date of each sale operation, have remaining maturities of 3 months to 3 years. Securities with less than 3 months to maturity as of the date of a sale operation will not be sold in order to provide markets with greater certainty about the maturity profile of the SOMA’s Treasury holdings.

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 each month in Treasury securities and how will this be communicated?
Monthly purchases and sales will total approximately $44 billion in par value, on average.

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 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:

(A)

(B)

0-30%

N/A

(35% of Outstanding Issuance) minus SOMA Holdings

30%-47.5%

5% of Outstanding Issuance

(50% of Outstanding Issuance) minus SOMA Holdings

47.5%-59%

2.5% of Outstanding Issuance

(60% of Outstanding Issuance) minus SOMA Holdings

59%-70%

1% of Outstanding Issuance

(70% of Outstanding Issuance) minus SOMA Holdings

Above 70%

Not Eligible for Purchase

What is the maximum amount the Desk will sell of its Treasury holdings?
The Desk will make available for sale all nominal coupon and TIPS securities with remaining maturities between 3 months and 3 years, with the amount available for sale rounded down to the nearest $1 million, in accordance with the $1 million minimum bid size.

What will the Desk do with proceeds from maturing Treasury securities?
Proceeds from maturing Treasury securities will be reinvested at auction into newly issued Treasury securities following existing procedures. For more information on these procedures, please see the most recent annual report published by the Desk at http://www.newyorkfed.org/markets/annual_reports.html.

Will proceeds from Treasury sales directly offset the value of Treasuries purchased?
The FOMC directive involves purchasing and selling $400 billion in Treasury securities in terms of par value. Given the differences in prevailing market prices for shorter-term and longer-term Treasury securities, the market value of securities purchased and sold 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 purchases and sales.

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 will not necessarily take place on the same day or in exactly the same size. Purchases and sales of Treasury securities associated with this program will be managed on a monthly basis.

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 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.

How will the SOMA’s securities lending facility be affected by sales associated with this program?
Outright sales will reduce the SOMA’s holdings of a given security that are available for securities lending. The remaining holdings in these securities will be available to borrow through the securities lending facility. The Desk may need to temporarily reduce the amount of a given security that is available for sale if it is on loan.

Operation
 

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 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 6 sales operations per month. The Desk will conduct one operation per day on most business days, but will occasionally conduct either no operations or multiple operations.

Each month, the Desk anticipates conducting approximately 14 operations to purchase nominal securities and one operation to purchase TIPS. The frequency of purchase operations by sector is listed in the table below:


Frequency of Monthly Operations

Nominal Coupon Securities

TIPS**

6 to 8 Years

8 to 10 Years

10 to 20 Years

20 to 30 Years

6 to 30 Years

3

3

1

7

1

Over the first four months of the program, the Desk conducted 5 purchase operations per month in the 20-year to 30-year sector. Going forward, to improve the efficiency of these operations, the Desk anticipates conducting approximately 7 purchases per month in this sector, with the total amount purchased per month in this sector remaining unchanged.

The Desk anticipates conducting approximately 5 operations to sell nominal Treasury securities and one operation to sell TIPS each month. 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 maturing in 3 months to 3 years. The Desk plans to sell between $8 billion and $9 billion in par value in each nominal operation and between $1 billion and $1.5 billion in par value in each TIPS operation. Operation amounts may vary modestly from month to month, though the Desk will ensure that $400 billion in par value will be sold across both nominal and TIPS holdings by the end of the program.

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 both dealer and dealer client participation.

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 the Federal Reserve Bank of New York Primary Dealer Support.

Reporting
 

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: October 19, 2011 »