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The Federal Reserve will purchase $105 billion of Treasuries over the next month as policy makers expand monetary stimulus measures to reduce unemployment and avert deflation.
The central bank will conduct 18 open-market operations from Nov. 12 through Dec. 9, according to a statement today on the Federal Reserve Bank of New York's website. The central bank is buying an additional $600 billion of Treasuries through June and expects to reinvest $250 billion to $300 billion of proceeds from mortgage-backed debt and agency securities into Treasuries.
The policy-setting Federal Open Market Committee embarked on a second round of unconventional monetary stimulus on Nov. 3 after a benchmark interest rate near zero and an earlier program to buy $1.7 trillion of securities failed to bring down an unemployment rate that's stuck near a 26-year high. The transactions announced today will be comprised of $75 billion of new purchases and $30 billion of reinvestment proceeds.
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The schedule "tells you the Fed is going to be around just about every day," said John Briggs, a U.S. government bond strategist at Royal Bank of Scotland Plc's RBS Securities unit in Stamford, Connecticut, one of 18 primary dealers that trade with the Fed. "Whereas we'd had supply all week and a tenuous 30-year auction. Now we have the Fed buybacks."
Treasuries reversed declines after the Fed announced the details of its purchase operations. Thirty-year bonds earlier declined as the U.S. sold $16 billion of the securities that drew a yield of 4.32 percent, compared with the average forecast of 4.288 percent in a Bloomberg News survey of eight dealers.
Purchase Schedule
The current 30-year bond was little changed to yield 4.25 percent at 3:33 p.m. in New York, according to BGCantor Market Data.
During the six-month long period, the central bank plans to distribute its purchases into eight maturity sectors, the largest percentages, at 23 percent each, in the 5.5 to 7 year maturity bucket and the 7 to 10 year range, according to a New York Fed statement on Nov. 3.
The Fed plans to purchase between $21 billion and $27 billion through three operations for Treasuries maturing from February 2018 to November 2020, or approximately the seven- to 10-year maturity range. They expect to purchase a similar amount also through three operations from Treasuries maturing between May and June 2016 through November 2017, or about five- to six- year maturity range.
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'First Cycle'
"Due to holidays and other scheduling tasks, the $105 billion for the first cycle will be front-loaded into this Friday to next Friday rather than being smoothly distributed over calendar time," Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients. "The initial maturity ranges of the first several purchases also skew a little longer than the average for the next four weeks."
Since Aug. 17, the Fed has been reinvesting proceeds of its maturing mortgage holdings into Treasuries to keep its System Open Market Account, or SOMA, at about $2 trillion and prevent a draining of cash from the banking system.
The central bank aims to buy assets during the program with an average duration of between five and six years, with about 86 percent of its purchases in securities maturing between 2.5 years and 10 years, the New York Fed said. Duration, a measure of a bond's price sensitivity to interest rate changes, generally increases with maturity.
The central bank eased a self-imposed 35 percent individual security holdings, allowing for increases "only in modest increments," for the purchases. For the first time in an outright Treasury purchase program the central bank will release at the end of each monthly cycle the prices paid for each security.
The first open-market operation on Nov. 12 will consist of $6 billion to $8 billion of Treasuries maturing from November 2014 through April 2016.
To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net; To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net.
by http://www.bloomberg.com/news/2010-11-10/fed-to-buy-105-billion-of-treasuries-over-next-month-under-stimulus-plan.html
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