Economics
Fed’s Latest Treasury Purchases Signal Liquidity Is Improving
- Buying cheapest-to-deliver bonds suggests lack of alternatives
- Pattern is consistent with tapering pace of purchases
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The Federal Reserve’s daily purchases of Treasury securities raised some eyebrows on Wednesday because in two of the four operations, bonds that were the cheapest-to-deliver into a Treasury futures contract were the most heavily bought.
Traders say it’s a good sign. The Fed’s purchase program began in mid-March with the aim of restoring liquidity in the Treasury market, which had eroded in particular for securities lacking any sort of distinction, such as being the most recently issued, otherwise known as “on the run,” or being cheapest-to-deliver into futures. Buying of CTDs suggests that other securities are no longer being offered as cheaply as they once were.