atprm
03-25-2009, 01:21 PM
By Scott Lanman
March 25 (Bloomberg) -- The Federal Reserve starts purchasing long-term Treasuries today, aiming to bring down borrowing costs by employing tools last used in the 1960s.
The first operation in the $300 billion effort is targeted on notes maturing from February 2016 to February 2019, the New York Fed Bank said in a statement yesterday. In the coming eight days, the central bank plans to buy debt maturing between March 2011 and February 2039, according to the tentative schedule.
The Fed joins central banks in the U.K. and Japan in extraordinary purchases of government debt, broadening efforts to unfreeze credit and end the recession after cutting the benchmark interest rate close to zero. The Fed’s purchases may ultimately be overwhelmed by new government borrowing to finance a budget deficit projected at $1.5 trillion this year.
“Over the short-term, the Fed purchases of Treasuries will lower rates, but the need to issue over $2 trillion in securities over the next 18 months will make this less than effective,” said Mark MacQueen, who helps oversee $7 billion as co-founder of Sage Advisory Services Ltd. in Austin, Texas.
Policy makers, led by Chairman Ben S. Bernanke, announced the Treasury-purchase decision last week along with a plan to more than double purchases of housing debt to $1.45 trillion, hoping to reduce rates on home loans.
The Fed said the 16 brokers known as primary dealers that help the central bank implement policy will be eligible to sell Treasuries to the Fed, both for themselves and their customers. The companies include units of Goldman Sachs Group Inc. and Bank of America Corp.
30-Year Bonds
Treasury 30-year bonds rose yesterday for the first time in four days after the Fed announced it was including the longest- maturity U.S. debt among securities to be purchased. Yields on 30-year bonds fell 4 basis points to 3.64 percent in New York, according to BGCantor Market Data. The price of the 3.25 percent bond due in February 2039 rose 25/32, or $7.81 per $1,000 face value, to 97 12/32.
The yield was little changed today as of 7 a.m. in London.
“Clearly the Fed has credibility and buying power at the moment, so they can force prices up” on Treasuries, said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.
Inflation Risk
The strategy carries risks of faster inflation, though, he said. “In the long run, I’m afraid they’re simply monetizing the debt and that we’re going to end up getting inflation down the road,” Mueller said.
While the Fed said last week its transactions would be concentrated in two-year to 10-year debt, the March 30 operation will target Treasuries maturing from August 2026 to February 2039. The yield gap between 10-year notes and 30-year bonds narrowed to 94 basis points yesterday from 104 basis points the day before. A basis point is 0.01 percentage point.
Starting April 1 and every two weeks thereafter, the New York Fed will release a tentative purchase schedule for the following two-week period. The Fed’s Open Market Committee authorized the $300 billion in purchases for six months.
The central bank’s latest efforts may help swell its balance sheet to more than $4 trillion this year. The last time the Fed had a targeted program of purchasing longer-dated Treasuries was in the 1960s, in a joint initiative called Operation Twist with the Treasury, which attempted to narrow the gap between short- and long-term debt.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
March 25 (Bloomberg) -- The Federal Reserve starts purchasing long-term Treasuries today, aiming to bring down borrowing costs by employing tools last used in the 1960s.
The first operation in the $300 billion effort is targeted on notes maturing from February 2016 to February 2019, the New York Fed Bank said in a statement yesterday. In the coming eight days, the central bank plans to buy debt maturing between March 2011 and February 2039, according to the tentative schedule.
The Fed joins central banks in the U.K. and Japan in extraordinary purchases of government debt, broadening efforts to unfreeze credit and end the recession after cutting the benchmark interest rate close to zero. The Fed’s purchases may ultimately be overwhelmed by new government borrowing to finance a budget deficit projected at $1.5 trillion this year.
“Over the short-term, the Fed purchases of Treasuries will lower rates, but the need to issue over $2 trillion in securities over the next 18 months will make this less than effective,” said Mark MacQueen, who helps oversee $7 billion as co-founder of Sage Advisory Services Ltd. in Austin, Texas.
Policy makers, led by Chairman Ben S. Bernanke, announced the Treasury-purchase decision last week along with a plan to more than double purchases of housing debt to $1.45 trillion, hoping to reduce rates on home loans.
The Fed said the 16 brokers known as primary dealers that help the central bank implement policy will be eligible to sell Treasuries to the Fed, both for themselves and their customers. The companies include units of Goldman Sachs Group Inc. and Bank of America Corp.
30-Year Bonds
Treasury 30-year bonds rose yesterday for the first time in four days after the Fed announced it was including the longest- maturity U.S. debt among securities to be purchased. Yields on 30-year bonds fell 4 basis points to 3.64 percent in New York, according to BGCantor Market Data. The price of the 3.25 percent bond due in February 2039 rose 25/32, or $7.81 per $1,000 face value, to 97 12/32.
The yield was little changed today as of 7 a.m. in London.
“Clearly the Fed has credibility and buying power at the moment, so they can force prices up” on Treasuries, said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.
Inflation Risk
The strategy carries risks of faster inflation, though, he said. “In the long run, I’m afraid they’re simply monetizing the debt and that we’re going to end up getting inflation down the road,” Mueller said.
While the Fed said last week its transactions would be concentrated in two-year to 10-year debt, the March 30 operation will target Treasuries maturing from August 2026 to February 2039. The yield gap between 10-year notes and 30-year bonds narrowed to 94 basis points yesterday from 104 basis points the day before. A basis point is 0.01 percentage point.
Starting April 1 and every two weeks thereafter, the New York Fed will release a tentative purchase schedule for the following two-week period. The Fed’s Open Market Committee authorized the $300 billion in purchases for six months.
The central bank’s latest efforts may help swell its balance sheet to more than $4 trillion this year. The last time the Fed had a targeted program of purchasing longer-dated Treasuries was in the 1960s, in a joint initiative called Operation Twist with the Treasury, which attempted to narrow the gap between short- and long-term debt.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.