The Federal Reserve began buying Treasuries in its third outright purchase of U.S. government debt as part of the central bank’s efforts to lower rates and stimulate economic growth. The Fed listed 17 securities for possible purchase between 10:15 a.m. and 11 a.m. New York time. The securities mature from August 2026 to February 2039, the Federal Reserve Bank of New York said in a statement today. The direct purchases are part of a joint effort by the central bank and government to lower consumer lending rates and stimulate economic growth. Treasury yields are linked to consumer loans such as mortgages. The Fed bought $7.541 billion in debt on March 27 and $7.5 billion on March 25, in the first outright purchases since the early 1960s. “The intention of the Fed is to pull down yields as much as possible, to make money as cheap as possible,” said Alexander Titsch-Rivero, head of derivatives and structured products in Frankfurt at BHF-Bank AG, a German private bank. The Fed purchases have helped “the market to find a cap for the 10-year yield, which is right about in the 2.8 to 2.85 percent range,” Titsch-Rivero said. “In the end, the market will find that the Fed has benchmarked a certain yield level for the 30-year as well.” Yields on benchmark 10-year notes dropped seven basis points to 2.69 percent, and fell seven basis points to 3.55 percent on 30-year bonds. Mortgage Rates The average 30-year mortgage rate as measured by Freddie Mac was 4.85 percent, or 2.11 percentage points more than the yield on 10-year Treasury notes on March 26, the most current data. The spread averaged 1.72 percentage points in the decade before the credit crisis began. Fed policy makers lowered the benchmark interest rate to a target range of zero to 0.25 percent in December and switched to using credit programs and outright purchases of Treasuries as the main tool of monetary policy, to pump cash into banks and bolster lending. The size of the Fed’s balance sheet has increased 56 percent to $2.07 trillion in the past year. The central bank’s assets will expand further after Fed Chairman Ben S. Bernanke earlier this month announced a $1.15 trillion effort to pump more cash into the economy through purchase of Treasuries and mortgage and agency securities, a policy known was quantitative easing. Purchase Forecast The Fed will likely purchase about $4 billion in bonds, according to Louis Crandall, chief economist at Jersey City, New Jersey-based research firm Wrightson ICAP LLC. That corresponds to just about two percent of the more than $200 billion of publicly held bonds in today’s target maturity area, or roughly the same percentage the Fed purchased in its first two operations, Crandall wrote in a note today. The Fed “originally announced that its purchases would be concentrated in the two- to 10-year sector, implying that other maturity ranges would be under-weighted,” Crandall wrote in the note. “The Fed already owns 35 percent of the total supply of the May 2037 bond, which means it cannot buy any more under its self-imposed position limit.” The Fed maintains a 35 percent per security limit for each specific Treasury it holds in its System Open Market Account, or SOMA. Securities purchased in the Treasury purchases program are held in SOMA. The central bank makes these securities available for loan to dealers against Treasury general collateral on an overnight basis. Dealers bid in a multiple-price auction held daily through its securities lending program. The central bank has announced plans to buy Treasuries through April 2. Starting on April 1 and continuing every other Wednesday, the Federal Reserve Bank of New York will announce a tentative Treasury purchase schedule for the following two calendar weeks. The Fed’s 16 primary dealers are eligible to sell Treasuries to the central bank, both for themselves and customers, as part of the program.

Source