Just as expected, the New York Fed disclosed that even as QE2 is being halted (briefly), QE Lite purchases of maturing securities will continue, across the Fed's 7 maturity segments: "At this time, the Desk anticipates conducting one operation per month in each maturity sector." As we have calculated before the total amount of monthly "flow" purchases will be about $32 billion, and likely declining, as less and less MBS are prepaid to the Fed. In other words, the bulk of purchases will once again be at the belly, with the least amount dedicated to the long-end, followed only by the 1.5-2.5 year segment, which however, if Bill Gross is right, will see a surge in activity as soon as Operation Twist 2 is announced at this year's Jackson Hole meeting.
Statement Regarding Purchases of Treasury Securities
On June 22, 2011, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk at the Federal Reserve Bank of New York (the Desk) to complete purchases of $600 billion of longer-term Treasury securities by the end of June. The FOMC also directed the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion.
Under the existing reinvestment policy, principal payments from agency debt and agency mortgage-backed securities (MBS) are reinvested in longer-term Treasury securities. In implementing this policy going forward, the Desk will follow operating practices similar to those established during the $600 billion Treasury purchase program.
Purchases will be allocated across maturities according to a distribution that is nearly identical to that executed under the Treasury purchase program. The only change to the distribution is that the two maturity sectors beyond 10 years from the earlier purchase program will be combined into a single maturity sector of 10 to 30 years in order to achieve greater operational simplicity. Specifically, the Desk plans to distribute purchases across seven maturity sectors based on the following approximate weights:
on-the-run 7-year note will be considered part of the 5½- to 7-year
sector, and the on-the-run 10-year note will be considered part of the
7- to 10-year sector.
**TIPS weights are based on unadjusted par amounts.
The size and frequency of operations will be reduced to levels commensurate with agency debt and MBS principal payments. At this time, the Desk anticipates conducting one operation per month in each maturity sector.
The Desk will continue to release a tentative schedule of purchase operations on or around the eighth business day of each month, with each schedule providing information on the operations expected to take place through the middle of the following month. The next schedule will be released on July 13, 2011.