This press release has been amended in accordance
with the United States Treasury Department’s decision to introduce
the three-year note on May 6, 2003. Amendments are in italicized
Original Release Date: Wednesday,
July 5, 2000
The Federal Reserve Bank of New York (FRBNY) today announced
several changes in the way it will manage the Federal Reserve
System’s portfolio of Treasury securities. These changes are
intended to help the FRBNY to manage the liquidity and average
maturity of the System Open Market Account (SOMA) over coming
quarters in light of recent and anticipated changes in the
quantity and composition of marketable Treasury securities.
The Manager of the SOMA has reviewed these changes with the
Federal Open Market Committee (FOMC) and they will remain
in place while the Federal Reserve undertakes a thorough review
of alternatives for open market operations in this environment.
The FRBNY has already begun to cap the amount of the SOMA’s
holdings of Treasury bills at 35 percent of any given issue,
both in terms of what will be rolled over at each auction
and in terms of acquisitions in the secondary market. The
SOMA’s holdings of Treasury coupon issues now also will be
capped in a similar manner on a graduated scale from 25 percent
for two-year notes down to 15 percent for coupon securities
with maturities of 10 years or more.
A key objective of the FOMC has been to maintain a relatively
short and liquid portfolio to enable the System to deal readily
with any contingencies that might arise in the course of managing
the reserve base. However, in recent years the average maturity
of the SOMA portfolio has lengthened from 2.6 years in 1992
to 4.2 years today. The changes announced today are designed
to help limit any further lengthening of the average maturity
of the SOMA.
These changes in Federal Reserve operations have been developed
in consultation with the Department of the Treasury. The public
announcement of these changes is intended to help market participants
to anticipate Federal Reserve operations in the face of changes
in the quantity and composition of outstanding Treasury debt.
Auction participation. Until now, the FRBNY routinely
has rolled over the SOMA holdings of Treasury securities into
new issues. In Treasury auctions, the FRBNY has placed non-competitive
bids for the SOMA, treated by the Treasury as "add-ons"
to the publicly–announced auction amounts, equal to the SOMA’s
holdings that mature on the auction settlement date.
The FRBNY henceforth will modify this procedure to avoid
the SOMA holding an ever-larger share of newly-issued securities.
Going forward, the FRBNY will place add-on bids for the SOMA
equal to the lesser of (a) the SOMA’s maturing holdings on
the issue date of a new security, or (b) a fixed percentage
of the total amount (including SOMA holdings) to be issued
of that new security.
Continuation of the current practice of rolling over the full
amount of the SOMA’s maturing holdings, while sizes of new
Treasury issues decline, would result in the Federal Reserve
acquiring an increasingly larger share of new issues. However,
the Federal Reserve has no portfolio need for the particular
liquidity characteristics of newly-issued, "on-the-run"
securities. At the same time, these newly-issued Treasury
securities are of particular value to more actively managed
private portfolios. Over time, as the Treasury adjusts its
issuance pattern, limiting the share of the SOMA’s holdings
of newly-issued Treasury securities will make a larger amount
of new securities available to satisfy this demand than would
otherwise be the case.
Over the coming year, these percentage limits on the size
of the SOMA’s participation in the primary market will be:
35 percent for one-year, six-month and three-month bills,
25 percent for the two-year note, 20 percent for the five-year
note, and 15 percent for the 10-year note and the 30-year
bond. As of May 6, 2003, the percentage limits on the size
of the SOMA’s participation in the primary market will be
23.3 percent for the three-year note. (Amended May 1, 2003)
In the bill sector, the application of the 35 percent limit
has already resulted in net redemptions by the SOMA. In the
coupon sector, these percentages would have had little impact
on the SOMA’s normal bidding to roll maturing securities into
recent new coupon issues. However, at lower issuance levels
these percentages could imply redemptions of maturing coupons
Secondary market. In managing the SOMA, the FRBNY has relied
upon secondary market purchases of Treasury securities as
the principal means of achieving the expansion of the asset
side of the Federal Reserve’s balance sheet necessary to accommodate
the trend growth of Federal Reserve liabilities in the form
of currency in circulation. In recent years, the FRBNY has
sought to spread its purchases evenly across the entire range
of outstanding nominal marketable Treasury coupon securities,
while seeking to avoid recently-issued securities, purchasing
only those securities that were at least twice "off the
The Federal Reserve has attempted to maintain a short average
maturity of the SOMA portfolio of Treasury securities. "Maturity
liquidity" is thought by the Federal Reserve to be an
important portfolio objective to permit a smooth contraction
in the size of the SOMA, should it be necessary to adjust
to a change in either the size or composition of the System’s
balance sheet. However, in the face of both heightened demand
for and reduced supply of Treasury bills in 1997 and 1998,
the FRBNY refrained from open market purchases of Treasury
bills from December 1997 to April 2000, contributing to the
lengthening in the SOMA’s average maturity that has occurred
in recent years.
Redemptions of the SOMA’s bill holdings, as a consequence
of the 35 percent limit in bill auction participation, will
tend to further increase the average maturity of the SOMA’s
overall holdings, counter to the System’s portfolio objective.
These bill redemptions, as well as redemptions of coupon securities
which could occur in the future as a consequence of the limits
on the SOMA’s primary market participation, will also add
to the growth in reserve needs that the Federal Reserve System
would need to accommodate.
In order to meet the Federal Reserve’s need to grow the asset
side of its balance sheet and consistent with the System’s
long-standing preference for maturity liquidity, the FRBNY
will focus its purchases more on shorter maturity coupon securities.
The FRBNY will no longer seek to spread purchases for the
SOMA so that they result in roughly equal percentage holdings
of Treasury coupon securities evenly across the maturity spectrum.
Rather, in conducting secondary market purchases, the FRBNY
will tend to purchase, over time, a greater proportion of
off-the-run securities with remaining maturities under two
years than it will purchase of off-the-run securities with
remaining maturities between 30 years and 10 years. Amounts
to be purchased of securities with remaining maturities in
the middle of the yield curve will be graduated between the
long and the short end.
The same percentage limits to be applied to auction participation
will serve as guidelines for the amounts that the SOMA will
ultimately be prepared to hold of off-the-run Treasury securities.
Thus, the FRBNY will, over time, conduct purchases consistent
with the SOMA holding up to:
- 35 percent of Treasury bill issues and of coupon securities
with remaining maturities of up to one year;
- 35 to 25 percent graduated between securities with remaining
maturities from one to two years;
- 25 to 23.3 percent graduated between securities with remaining
maturities from two to three years;*
- 23.3 to 20 percent graduated between securities with remaining
maturities from three to five years;** (Previous two items
amended May 1, 2003)
- 20 to 15 percent graduated between securities with remaining
maturities from five to 10 years;
- and 15 percent of securities with remaining maturities
from 10 to 30 years.
Given the larger issue sizes of these seasoned, off-the-run
securities, these guidelines should provide ample opportunity
for purchases for the SOMA over coming quarters.
The timing and amount of all open market operations will continue
to be a function of the FRBNY’s assessment of demand and supply
conditions in the market for banking system reserves, consistent
with the FOMC’s target for the federal funds rate. The mix between
temporary and outright operations also will continue to reflect
the FRBNY’s assessment of conditions in the market for Treasury
securities and SOMA portfolio needs.
The FRBNY will continue to avoid purchasing recently-issued
securities in the secondary market.
The FRBNY will continue to purchase Treasury Inflation-Indexed
Securities (TIIS) in the secondary market for SOMA, consistent
with the FRBNY’s assessment of conditions in the market for
Each Thursday afternoon the FRBNY will publish on its website
the complete details of the SOMA’s holdings as of the close
of business each Wednesday.
The Manager of the SOMA, after consultation with the FOMC, may
change the percentage limits noted above as they apply to both
primary and secondary market operations.
Any such changes or other exceptions will be announced publicly.
*Before introduction of
three-year note, this item read: 25 to 20 percent graduated
between securities with remaining maturities from two to five
** Before introduction of three-year note, this item read: 25
to 20 percent graduated between securities with remaining maturities
from three to five years.