HI Bonnie, A coupon Pass is a permanent injection of liquidity into the banking system...this expands the money supply...
<<<<<and A Grub to Boot!!>>>
If you have 10 Mill of a US bond issue and I want to buy your
10 Mill position...Then I no longer have that 10 Mill to buy AMZN
stock with.
However if the Federal Reserve buys your 10 MIll in a market operation
(the coupon pass is one example) then I have my 10 Mill You now
have 10 Mill and so we can both buy something with the 20 Mill
total...example AMZN.
The reason to exclude certain maturity date and or coupon yields
is that a given series of debt may be smaller or less accessible,
because its buried in portfolios of holders who will not sell it
before redemption, and since this is just US Govt paper and not
rare coins....it helps to reduce the chance that the Fed buys too
much of an illiquid issue that artificially pushes up the price, due
to a short squeeze.....
Her is an excerb A Fed Reserve bulletin discussing Open Market Operations in 1996 available from
here search.federalreserve.gov
the main web site is
bog.frb.fed.us
<. Each set of coupon passes consisted of
three separate operations covering different sectors of
the yield curve. Only a very small amount of securi-ties
was purchased directly from foreign accounts. In
addition to providing the reserves necessitated by
movements in operating factors, outright purchases
offset $2.4 billion of redemptions of securities. These
redemptions primarily reflected original issue seven-year
Treasury notes and some holdings of federal
agency securities that matured on dates when no
suitable replacement securities were available.
After the bill pass in November, no further outright
purchases were made in 1996. In previous years, a
greater portion of the reserve needs caused by the
late-year seasonal buildup in currency and required
reserves was met with permanent additions to the
SOMA, with the Desk typically arranging one addi-tional
outright operation over the balance of the year.6
These acquisitions also usually left the Desk in a
position of having to drain reserves with temporary
(and sometimes even permanent) operations in late
January or early February of the following year when
the seasonal increases in currency and required
reserves unwound. This time of year is also typically
marked by seasonally low levels of required reserve
balances because levels of vault cash remain high
when the level of reserve requirements declines
sharply.
The absence of further outright operations in late
1996 was intended to place the Desk in a position of
needing to add reserves with temporary operations
when required reserve balances reached their sea-sonal
low level early in 1997. Two factors motivated
this decision. First, the Desk did not want to drain
reserves during periods when low operating balances
might lead to late-day firmness in the money market.
Second, bank reserve managers had all their experi-ence
with new lows in operating balances in 1996 in
the context of net reserve shortages. The Desk felt
that it would be better situated to respond to any
resultant change in funds market conditions with RPs
rather than matched-sale transactions.
SOMA Portfolio Management
Over the course of the year, the Desk continued to
manage the permanent holdings in the SOMA domes-
tic portfolio in a manner that ensured the liquidity of
the portfolio. Liquidity was maintained by holding
Treasury bills and Treasury coupon securities in
roughly equal proportions. At the same time, to mini-mize
any influence over the available public holdings
of specific issues and thereby leave debt management
in the domain of the Treasury, the acquisition of bills
and coupons largely mirrored the distribution of Trea-sury
issues within these two general classes of instru-ments.
As of the end of 1996, the net impact of all the
Desk's activities affecting its permanent holdings,
including rollovers of maturing securities, left the
average maturity of Treasury securities in the SOMA
at 41 months, about two months greater than it was
one year earlier but below the 61-month average
maturity of total marketable Treasury debt. The
Treasury's expanded issuance of 10-year notes and
30-year bonds contributed to the slight increase in
maturity of the SOMA portfolio.
In late October, the Treasury announced that it
would change the treatment of SOMA's noncompeti-tive
bids at Treasury bill auctions. Beginning in the
first part of 1997, SOMA rollovers would be treated
as add-ons to the publicly auctioned amount rather
than deductions from the total auctioned size. This
change would provide better information to market
participants about the amount of bills available
for sale to the public, with the only remaining
uncertainty being the rollover amount of foreign
institutions.>>>>>>>
That's my stab at this. I am not an expert---and I also wanted
to give an artificially simple example to illustrate the concept
and not put the one person who got down to here asleep...
Best advice I ever Heard-----Central Banking is Best Left To
the Central Bankers.......God Forbid Jim Hopkins ever sees this quote
I think I live in the state as him....he'll come and abuse me<<VBG>> |
