Effective March 20, 2019
How does the Desk intend to implement the FOMC’s plan to slow the reduction of its holdings of Treasury securities?
As noted in the March 2019 Balance Sheet Normalization Principles and Plans, the Federal Open Market Committee (FOMC) intends to slow the reduction of the Federal Reserve’s holdings of Treasury securities by lowering the cap on monthly Treasury redemptions. Specifically, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York will continue to roll over at auction the principal payments from holdings of Treasury securities maturing during each calendar month that exceed the cap amount for that month. Based on the March 2019 Principles and Plans, in May 2019, the monthly cap will be reduced from $30 billion to $15 billion. The monthly cap will remain at $15 billion until the end of September 2019, when it will be removed and the reduction in the aggregate securities holdings in the System Open Market Account (SOMA) will conclude.
For the schedule of monthly caps, see: https://www.newyorkfed.org/markets/opolicy/operating_policy_190320.
In addition to reinvesting principal payments from maturing Treasury securities via rollovers, beginning in October 2019, principal payments from agency debt and agency MBS holdings will be reinvested in Treasury securities via secondary market purchases subject to a maximum amount of $20 billion per month; any principal payments in excess of $20 billion will continue to be reinvested in agency MBS in a manner consistent with current practices. The Treasury securities purchases will initially be conducted across a range of maturities to roughly match the maturity composition of Treasury securities outstanding. The Desk will provide more details on these operations in May.
What is a SOMA Treasury Rollover?
A SOMA Treasury rollover describes the process by which principal payments from maturing Treasury securities held by SOMA are reinvested in newly auctioned securities. Specifically, the Desk places non-competitive bids at Treasury auctions, in an amount equal to all or a portion of the maturing Treasury securities, that will settle on the maturity date of the maturing Treasury securities. On the auction settlement date, the maturing Treasury securities are exchanged for the newly issued Treasury securities.
How will the Desk determine the amount to roll over at each issuance date?
The Desk will calculate the rollover amount by subtracting the monthly cap from the amount of principal payments scheduled to be received during a calendar month. It will then allocate that rollover amount between the mid-month and end-of-month maturity dates in proportion to the amount of SOMA securities scheduled to mature on those dates.
For example, consider the situation where the SOMA holds $21 billion in Treasury securities that mature over the month. In this example, assume the FOMC has directed the Desk to apply a $6 billion cap, resulting in a monthly rollover amount of $15 billion. To determine the amount of mid-month and end-of-month rollovers, the Desk would allocate the rollover amount across the mid-month and end-of-month maturities in proportion to the amount of SOMA securities scheduled to mature on each maturity date. In this example, assume $7 billion of the maturities occur on the mid-month date and the remaining $14 billion occur on the month-end date. This would result in the Desk rolling over $5 billion at the mid-month date and $10 billion at the end-of-month date.
|Proportion of Maturing Funds
|New Rollover Amount with $6 Billion Cap
How will the Desk allocate rollovers across newly issued securities at Treasury auctions?
Consistent with current practice, rollovers will continue to be accomplished by placing non-competitive bids at Treasury auctions; the Desk’s bids will be allocated across the securities being issued in proportion to their announced offering amounts. Using the same scenario as the example above, the securities maturing on the mid-month date would be exchanged for securities being issued on that same day. For the purpose of this example, assume the Treasury is auctioning a 3-year, a 10-year, and a 30-year security for $25 billion, $15 billion, and $10 billion respectively. The $5 billion would be allocated across these three securities in proportion to their announced offering amounts, as shown below:
|Amount of Principal Being Exchanged
|Security Being Auctioned
|Announced Offer Size
Securities maturing on the month-end date would be exchanged for securities being issued on that same day. For the purpose of this example, assume the Treasury is auctioning a 2-year security, a 5-year security, and a 7-year security for $20 billion, $20 billion, and $10 billion, respectively. The $10 billion would be allocated across these three securities in proportion to their announced offering amounts, as shown below:
|Amount of Principal Being Exchanged
|Security Being Auctioned
|Announced Offer Size
How does the Desk manage a month-end maturity that occurs on a weekend or a holiday?
If a month-end maturity occurs on a weekend or holiday, that maturity will be included in the total maturing funds for the month corresponding with the stated maturity date, not for the month in which the funds are actually received. For example, if December 31 occurs on a Sunday, any SOMA maturities that occur on December 31 will be treated as part of the December maturities, even though the cash flow associated with that maturity will occur on the next business day in January.
How does the Desk manage different issue types for rollovers?
SOMA holdings of Treasury notes, bonds, Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRNs) that are being rolled over are exchanged at auction across all Treasury notes, bonds, TIPS, and FRNs issued on that day in proportion to their issuance sizes. With respect to TIPS securities, the maturing principal amount includes the inflation adjustment.
What are the limits on the SOMA holdings of any one Treasury issue?
SOMA holdings are currently limited to not more than 70 percent of the total outstanding amount of any one Treasury security.
Is there a minimum amount of maturing securities required for rollover?
The Desk exchanges all maturing holdings in excess of the designated cap for Treasury securities at auction, subject to the U.S. Treasury’s $100 minimum bid requirement.
Will the Desk sell Treasury securities if the monthly cap exceeds the monthly principal payment amount?
No. The cap is the maximum amount that the SOMA holdings of Treasury securities will decline each month. If the total amount of monthly Treasury principal payments was below the monthly cap amount, then the reduction in the SOMA’s Treasury security holdings that month would be equal to the amount maturing, and no rollovers would occur.
How do SOMA rollovers affect the price of the auctioned securities?
SOMA tenders are entered as noncompetitive bids and therefore do not affect the stop-out rate of the auction. Noncompetitive bidders receive the stop-out rate, yield or discount margin determined by the competitive auction process. When the SOMA is awarded securities at auction, the Treasury Department increases the total issue size by the amount of the SOMA’s award.
When do SOMA holdings of Treasury securities change as a result of the FOMC’s balance sheet normalization plans?
Changes in SOMA Treasury holdings resulting from the FOMC’s balance sheet normalization plans will occur on the maturity dates for the monthly Treasury maturities.
SOMA Treasury holdings are reported on a weekly basis in the H.4.1 statistical release. Over any period, changes in the H.4.1 line item "U.S. Treasury securities" reflect the net effect of Treasury securities not rolled over at maturity, movements in inflation compensation, and purchases or sales of Treasury securities associated with small value operational readiness exercises.
For example, for the month of October 2017, SOMA maturities amounted to $8.7 billion, with all maturities occurring on October 31. The monthly cap in October was $6 billion, so the Desk rolled over $2.7 billion into new Treasury securities and allowed $6 billion to mature without reinvestment. The H.4.1 reported holdings of U.S. Treasury securities of $2,465.7 billion as of October 25, 2017 and holdings of $2,459.8 billion as of November 1, 2017. This $5.9 billion change represented the $6 billion decline associated with the application of the monthly cap and a $0.1 billion increase associated with changes in inflation compensation.
Where can I find more information on rollovers and SOMA’s Treasury holdings?
The latest data on the SOMA’s holdings can be found on the New York Fed’s website. The amount that was awarded to the SOMA at auction is reported in the Auction Results released by the Treasury Department upon the conclusion of each auction.