Fed to Buy $44B, Sell $44B of Debt in Oct.

By Caroline Salas Gage and Cordell Eddings - Oct 1, 2011 1:32 AM GMT+0700
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The Federal Reserve will purchase $44 billion of longer-maturity Treasuries and sell the same amount of shorter-term debt in October under its monetary stimulus plan that’s become known as Operation Twist. Photographer: Brendan Smialowski/Bloomberg

The Federal Reserve will purchase $44 billion of longer-maturity Treasuries and sell the same amount of shorter-term debt in October under its monetary stimulus plan that’s become known as Operation Twist.

Purchases will begin Oct. 3 with the acquisition of $2.25 billion to $2.75 billion of Treasuries maturing between February 2036 and August 2041, according to a statement today from the Federal Reserve Bank of New York, the branch of the Federal Reserve System that implements monetary policy.

The Federal Open Market Committee said last week that it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and counter rising risks of a recession. Treasury 30-year bonds extended gains after today’s announcement.

“The most notable part of the Fed announcement is that they are emphasizing the purchases first as evidenced by the long bond purchases followed by 10-year debt purchases,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Yields on 30-year bonds fell 14 basis points, or 0.14 percentage point, to 2.91 percent at 2:31 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 increased 3 2/32, or $30.63 per $1,000 face amount, to 116 20/32.

Long-Bond Rally

After the Fed announced Operation Twist on Sept. 21, the yields dropped 41 basis points last week in the biggest five-day decrease in almost three years. Thirty-year yields have tumbled 140 basis points over the past three months, the biggest quarterly reduction since the period ended December 2008.

The Fed will buy Treasury securities 13 times a month and sell its holdings of U.S. government debt six times, the New York Fed said on Sept. 26. The Fed will sell $8 billion to $9 billion of nominal Treasuries five times a month per operation and $1 billion to $1.5 billion of TIPS, in one operation. The Fed will buy Treasuries 12 times a month and TIPS once a month.

The Fed also announced last week that it would switch the reinvestment of its holdings of maturing housing debt to mortgage-backed securities from Treasuries. The New York Fed said this week it plans to buy $10 billion of agency mortgage- backed securities between Oct. 3 and Oct. 13.

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net