Why is the Desk purchasing longer-term Treasury securities?
On June 22, 2011, the Open Market Trading Desk at the Federal Reserve Bank of New York (the Desk) was given a directive from the Federal Open Market Committee (FOMC) to maintain the existing policy of reinvesting principal payments from agency debt and agency mortgage-backed securities (MBS) holdings into longer-term Treasury securities. The objective of this policy is to maintain at a constant level the face value of domestic securities held in the Federal Reserve’s System Open Market Account (SOMA). In particular, holdings of domestic securities in the SOMA will be maintained near $2.654 trillion.
How much will the face value of domestic securities held in the SOMA vary from the $2.654 trillion level?
Total SOMA assets will likely vary around $2.654 trillion to some degree due to differences in settlement dates for purchases of Treasury securities and principal payments on agency debt and agency MBS. As purchases and principal payments settle, the actual face value of domestic securities held in the SOMA may be above or below $2.654 trillion dollars on any given week.
What Treasury securities will the Desk purchase?
Beginning with the operations included in the tentative schedule announced on July 13, 2011, the Desk plans to distribute purchases across the following seven maturity sectors based on the approximate weights below:
**TIPS weights are based on unadjusted par amounts.
This distribution represents an allocation that is nearly identical to the distribution used to purchase longer-term Treasury securities under the FOMC’s November 2010 directive, with the exception that the 10- to 17-year and 17- to 30-year sectors have been combined into one maturity sector for operational simplicity. The total proportion of purchases allocated to securities maturing in more than ten years will remain unchanged.
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 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 Treasury bills, STRIPS, or securities trading in the when-issued market.
How much will the Desk 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, the Desk will maintain its operating policy to temporarily relax the 35 percent per-issue limit on SOMA holdings. Accordingly, 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.
How much will the Desk purchase each month in Treasury securities and how will this be communicated?
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. The announced purchase amounts will be approximately equal to the amount of principal payments from agency debt and agency MBS expected to be received over that period, adjusted for any variations from prior periods.
Will principal payments from other Federal Reserve holdings, such as those held in the Maiden Lane portfolios, be reinvested in longer-term Treasury securities?
No, repayments from other Federal Reserve holdings, including the Maiden Lane portfolios, SOMA assets denominated in foreign currencies, and any other Federal Reserve asset holdings, will not be reinvested into longer-term Treasury securities.
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.
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 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 the 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 the Federal Reserve Bank of New York’s primary dealers through a series of multiple-price competitive auctions using the Desk’s FedTrade system.
How often will the Desk conduct operations to purchase longer-term Treasuries?
In general, the Desk will aim to conduct 7 operations per month.
How many offers can a dealer submit during an operation?
Dealers will be limited to nine offers per issue.
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 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 continue 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. 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.
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 occur on a T+1 basis, i.e. one business day after the day of the operation, via the Fedwire Securities System.