QE4EVA Expands Fed-Eligible Treasury Purchases To All Risky Paper

Where under Twist there was a two year window in the Treasury curve that was the "no man's land" of Fed monetizations, as only bonds in the 6-30 year window were eligible for direct purchases, even as the "ZIRP through mid-2015" language kept 0-3 year maturity bonds risk free and thus cash equivalent, with QE4EVR we now have the Fed purchasing virtually all risky paper. Because if one assumes that the 6.5% unemployment rate will not be reached until mid-2015, and it won't, it means all bonds 0-3 years are still risk-free, but instead the Fed has moved the purchase border on the left to anything older than 4 years. In doing so, the Fed is now effectively in charge of the entire curve, but implicitly it means the 5 year spot, and the curve belly in general, will be of particular interest: look for 2s5s flatteners to be the best trading positions in the next few weeks as traders position accordingly.

The full breakdown of Fed purchases:

Form the NY Fed:

On December 12, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase longer-term Treasury securities after the maturity extension program is completed at the end of December 2012, initially at a pace of about $45 billion per month.  The FOMC also directed the Desk to continue purchasing additional agency mortgage-backed securities (MBS) at a pace of about $40 billion per month.  These actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The FOMC also directed the Desk to maintain its existing policy of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS, and, in January, to resume rolling over maturing Treasury securities into new issues at auction.

Beginning in January, the purchases of longer-term Treasury securities will be distributed across 7 sectors based on the following approximate weights:

Nominal Coupon Securities by Maturity Range*
4 – 4¾ Years
4¾ – 5¾ Years
5¾ – 7 Years
7 – 10 Years
10 – 20 Years
20 – 30 Years
4 – 30 Years

*The on-the-run 7-year note will be considered part of the 5¾- 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.

Under this distribution, the Desk anticipates that the Treasury securities purchased will have an average duration of approximately 9 years, roughly the same as the net of the duration of the securities purchased and sold under the maturity extension program.  The distribution of Treasury securities purchased could change if market conditions warrant.

The Desk will continue to publish a tentative schedule of Treasury purchase operations for the following calendar month on or around the last business day of each month. The schedule will include the anticipated amount of purchases to be conducted, operation dates, settlement dates, security types (nominal coupons or TIPS) to be purchased, the maturity date range of eligible issues, and an expected range for the size of each operation. The next schedule of operations will be released on Monday, December 31.  The amount of additional agency MBS to be purchased each month will also be announced on or around the last business day of the prior month.

Consistent with current practices, the purchases of Treasury securities and agency MBS will be conducted with the Federal Reserve’s primary dealers through a competitive bidding process and results will be published on the Federal Reserve Bank of New York’s website. The Desk will continue to publish transaction prices for individual operations at the end of each monthly period.  All other purchase details remain the same at this time.

Frequently Asked Questions associated with these purchases, which include a technical adjustment to the process of reinvesting maturing Treasury securities into new issues at auction, will be released later today.