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Tuesday, August 17, 2010

Fed Buys $2.551 Billion Treasuries in Resumption of Purchases


The Federal Reserve bought $2.551 billion of Treasuries in the first outright purchase of U.S. government debt since October to prevent money from being drained from the financial system.

The Fed bought 14 of the 25 securities listed for possible purchase. The notes mature from August 2014 to February 2016, the Federal Reserve Bank of New York said in a statement today on its website. The New York Fed conducts open-market operations to implement the policies of the Federal Reserve System.

“The Fed’s choice to reinvest the maturing coupons has put yet another structural buyer into the market, suggesting that this lower-yield environment is here to stay for the foreseeable future,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That information was anticipated, priced in and we’ve now moved back to trading the fundamentals.”

The Fed plans to keep holdings in the System Open Market Account, or SOMA, at about $2.054 trillion, the amount it held on Aug. 4, by using the proceeds from maturing mortgage-backed securities to buy Treasuries. The purchases are the Fed’s first attempt to bolster the economy in more than a year.

The benchmark 10-year note snapped a two-day advance, pushing yields up from the lowest since March 2009, generic data compiled by Bloomberg show. Yields climbed 7 basis points to 2.63 percent after falling 11 basis points yesterday in New York, according to BGCantor Market Data.

Purchase Plans

The purchases should average about $2 billion per operation, according to Wrightson ICAP, a Jersey City, New Jersey-based research unit of ICAP Plc that specializes in U.S. government finance.

Dealers tendered $20.95 billion today, according to the New York Fed’s website.

“By maintaining the SOMA portfolio at the same level, the Fed will stem the gradual ‘quantitative tightening’ that would otherwise occur, while also furthering its goal of moving toward a Treasury-only portfolio,” JPMorgan Chase & Co. strategists Srini Ramaswamy and Kimberly Harano wrote in a report Aug. 13. “On the face of it, this change seems minor, and almost operational in nature. However, it is not insignificant.”

JPMorgan Chase strategists estimated the Fed will buy about $284 billion in Treasuries during the next year, or more than the combined purchases of Japan and China during the year ended May. Analysts at Credit Suisse Group AG forecast purchases of $307 billion, with $47 billion coming from the proceeds of maturing agency debentures.

Nine Operations

The Fed last week announced nine outright purchase operations, including one for Treasury Inflation Protected Securities, for the month ended Sept. 13, for an estimated $18 billion in total. The Fed will report its purchase schedule in one-month increments, with amounts based on the principal payments from the Fed’s agency debt and agency mortgage-backed securities.

The Fed maintains a 35-percent-per-security limit of the amount outstanding for each specific Treasury it holds in the account. The central bank makes the securities available for loan to dealers against Treasury general collateral on an overnight basis. Dealers bid in a multiple-price auction held every day at noon New York time through its securities lending program.

The central bank last week left the overnight interbank lending rate target unchanged in a range of zero to 0.25 percent, where it’s been since December 2008.

Last year’s Treasury purchases were the first outright of U.S. government debt by the Fed since the 1960s. The central bank completed purchases of $1.45 trillion in mortgage-backed and housing agency debt in March 2010.