Bloomberg News

Fed to Purchase Treasuries 13 Times a Month, Sell Six Times

September 26, 2011

(Updates with MBS spread in last paragraph.)

Sept. 26 (Bloomberg) -- The Federal Reserve said it will buy Treasury securities 13 times a month and sell its holdings of U.S. government debt six times under its plan to lower borrowing costs known as Operation Twist.

The Fed will sell $8 billion to $9 billion of nominal Treasuries five times a month per operation and $1 billion to $1.5 billion of Treasury Inflation Protected Securities, or TIPS, in one operation, according to a statement today from the Federal Reserve Bank of New York. The Fed will buy Treasuries 12 times a month and TIPS once a month.

The Federal Open Market Committee said last week that it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and counter rising risks of a recession. The so- called Operation Twist drew three dissents as Chairman Ben S. Bernanke struggled to find consensus to help an economy plagued by 9.1 percent unemployment.

The action “should exert downward pressure on longer-term interest rates and help make broader financial conditions more accommodative, thereby supporting a stronger economic recovery,” Fed Governor Sarah Bloom Raskin said today in a speech in Washington, reiterating a point from the FOMC’s statement. The panel cited “significant downside risks to the economic outlook, including strains in global financial markets.”

10-Year Yields

Yields on the benchmark 10-year Treasury note increased 6 basis points, or 0.06 percentage point, to 1.90 percent at 4:01 p.m. in New York, according to Bloomberg Bond Trader prices. That’s down from a yield of 1.94 percent on Sept. 20, the day before the Fed announced Operation Twist.

The Fed also announced last week that it would switch the reinvestment of its holdings of maturing housing debt to mortgage-backed securities from Treasuries. The New York Fed said today it plans to buy $10 billion of agency mortgage-backed securities between Oct. 3 and Oct. 13.

“Our announcement appears to have been successful in narrowing the spread between rates on agency MBS and Treasury securities of comparable maturity,” a spread that had “widened substantially since earlier this year,” threatening to raise home-loan costs, Raskin said today, referring to mortgage-backed securities.

The difference between yields on Fannie Mae’s current- coupon 30-year fixed-rate securities and 10-year Treasuries shrank to 1.05 percentage point as of 4 p.m. today in New York, according to data compiled by Bloomberg. That gap has narrowed from 1.22 percentage point the day before the plan was announced, after ending last year at 0.84 percentage point.

--With assistance from Liz McCormick and Jody Shenn in New York. Editors: Dave Liedtka, Christopher Wellisz

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net


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