The Federal Reserve will purchase $105 billion of Treasurys over the next month as policy makers expand monetary stimulus measures to reduce unemployment and avert deflation.
The central bank will conduct 18 open market operation from Nov. 12 through Dec. 9, according to a statement today on the Federal Reserve Bank of New York’s website. The central bank is buying an additional $600 billion of Treasurys through June and expects to reinvest $250 billion to $300 billion of proceeds from mortgage-backed debt and agency securities into Treasurys.
The policy-setting Federal Open Market Committee embarked on a second round of unconventional monetary stimulus on Nov. 3 after a benchmark interest rate near zero and an earlier program to buy $1.7 trillion of securities failed to bring down an unemployment rate that’s stuck near a 26-year high. The transactions announced today will be comprised of $75 billion of new purchases and $30 billion of reinvestment proceeds.
“Virtually every maturity sector is a winner in some sense as the overall pace of the Fed’s purchases will more than triple,” Louis Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, wrote in a note on Nov. 8. “The biggest beneficiaries will be seasoned 10-year notes. The Fed’s monthly purchases of seasoned 10-year notes between now and June will exceed the Treasury’s average gross issuance of new 10-year notes.”
During the six-month long period, the central bank plans to distribute its purchases into eight maturity sectors, the largest percentages, at 23 percent each, in the 5.5 to 7 year maturity bucket and the 7 to 10 year range, according to a New York Fed statement on Nov. 3.
The Fed plans to purchase between $21 billion and $27 billion through three operations for Treasurys maturing from February 2018 to November 2020, or approximately the seven- to 10-year maturity range. They expect to purchase a similar amount also through three operations from Treasurys maturing between May and June 2016 through November 2017, or about five- to six- year maturity range.
Since Aug. 17, the Fed has been reinvesting proceeds of its maturing mortgage holdings into Treasurys to keep its System Open Market Account, or SOMA, at about $2 trillion and prevent a draining of cash from the banking system.
The central bank aims to buy assets during the program with an average duration of between five and six years, with about 86 percent of its purchases in securities maturing between 2.5 years and 10 years, the New York Fed said. Duration, a measure of a bond’s price sensitivity to interest rate changes, generally increases with maturity.
The central bank eased a self-imposed 35 percent individual security holdings, allowing for increases “only in modest increments,” for the purchases. For the first time in an outright Treasury purchase program the central bank will release at the end of each monthly cycle the prices paid for each security.
The first open-market operation on Nov. 12 will consist of $6 billion to $8 billion of Treasurys maturing from November 2014 through April 2016.
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