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Fed Will Need to Boost Purchases of Newly Issued Debt, FTN Says

The Federal Reserve may have to accelerate purchases of more newly issued Treasuries under its latest round of quantitative easing as the world’s largest bond firms’ willingness to sell ebbs, according to FTN Financial.

The Federal Open Market Committee said today it would buy $45 billion a month of U.S. government debt. That’s on top of the $40 billion in mortgage securities the central bank is buying each month to keep borrowing rates low.

The latest move will follow the expiration at the end of this year of Operation Twist, in which the central bank each month has swapped about $45 billion in short-term Treasuries for an equal amount of long-term debt. That program kept the total size of the balance sheet unchanged, while the new purchases will expand the Fed’s holdings.

“Given the maturity distribution breakdown -- designed to mimic net duration of” nine years of Twist -- the Fed may have to buy more current coupons than in Twist, Jim Vogel, head of agency-debt research at FTN in Memphis, Tennessee, wrote in a client note. He wasn’t immediately available to comment.

The 21 primary dealers that are obligated to trade with the Fed submitted offers equaling $2.73 for each $1 of the securities bought by the Fed, based on the latest weekly average. That compares with a weekly average of $2.99 in offers since the start of Twist, according to data compiled by Bloomberg.

The Fed has pumped more than $2 trillion into the financial system since its first round of QE in 2008.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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