10:39 AM
FED TALK: The Fed is conducting a coupon pass, its first since the terrorist attacks, wherein they will purchase U.S. Treasuries in the open market for their own account. The Fed last bought Treasuries on Sept. 6 when they bought $851 million of short maturities. The Fed has refrained from coupon passes since then despite a growing seasonal need for injections of money into the banking system. The Fed has not conducted coupon passes out of concern they might exacerbate the shortages of Treasury collateral on Wall Street. The Fed conducts coupon passes because the need for money in the banking system is too large to be addressed with the Fed's daily open market operations (temporary injections of money) alone. The Fed has chosen the 11/15/08 to 2/15/21 sector for today's pass, excluding callables and inflation-indexed securities. The Fed has significantly increased its open market purchases in recent months due to changes in the Fed's procedures. As Dana Saporta of Stone & McCarthy Research Associates notes, last year the Fed announced changes to its open market operations that affects they way the Fed manages its portfolio of Treasury securities. For starters, the Fed announces that they want to avoid any further lengthening of their System Open Market Account (SOMA) which has lengthened from 2.6 years in 1992 to 4.2 years as of July 5th, 2000. Therefore, the Fed is expected to purchase more short-term debt than they have in recent years. Importantly, until July, the Fed routinely rolled over its SOMA holdings into new Treasuries. But since July, the Fed altered that procedure so that less than the full amount of the Fed's SOMA holdings will be henceforth rolled over. This means that the Fed must buy more Treasuries in the open market than in the past. Hence, the increase in coupon passes. Although today's operation is technical, it is notable the money has been growing at near reacord levels recently. |
