Fed Sets 70% Per-Security Limit on Treasury Purchases

The Federal Reserve in Washington
The U.S. Federal Reserve in Washington. Photographer: Melissa Golden/Bloomberg

The Federal Reserve said it will limit its purchases to 70 percent of any single Treasury security as part of its plan to expand its balance sheet that’s known as quantitative easing.

The central bank had temporarily relaxed its 35 percent limit in November when announcing additional purchases of $600 billion of Treasuries through June. The New York Fed in a statement today gave allowable purchase percentages for three brackets in its system open market account, or SOMA, consisting of securities it holds, from more than 30 percent to 70 percent.

The Fed has acquired about $144.249 billion of Treasuries since it resumed buying U.S. government debt on Nov. 12. The central bank bought $14.569 billion in debt through two open-market operations today, the largest amount since it restarted the program after completing $1.7 trillion in debt purchases in March.

“This gives some clarification on what the end game is for the Fed with regard to individual security purchases,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of the 18 primary dealer that trade with the central bank. “There are some issues that the Fed holds over 40 percent and people were wondering if they would remain cheap if there was no liquidity because the Fed owns them all. Now not only can the Fed not own 100 percent of an issue, it will also take them considerably longer to increase its holdings.”

Individual Holdings

The Fed introduced a sliding scale for the amount of an individual security it can purchase in an operation when it already owns over 30 percent. The percentage of incremental debt it can buy of a particular security declines as the percent held in its SOMA account increases.

As of Dec. 17, the Fed owned 49.93 percent of the 8.75 percent coupon Treasury note maturing Aug. 15, 2020, and 49.82 percent of the 8.5 percent coupon note maturing in Feb. 15, 2020, according to Fed data compiled by Barclays Plc.

The Fed had said Nov. 3 that it would allow individual security holdings to top the previously self-imposed 35 percent level “only in modest increments,” according to a statement posted that day on the New York Fed’s website. Once a security reached 30 percent, “additional purchases of the given security will generally be capped at 5 percent of the total outstanding issue size in each subsequent operation,” the statement said.

The central bank also plans to reinvest $250 billion to $300 billion of proceeds from mortgage-backed debt and agency securities into Treasuries.

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