What the Fed can’t buy | FT Alphaville

What the Fed can’t buy

So the Federal Reserve will be buying more US Treasuries, using run-off proceeds to do so.

According to its release, the Fed plans to buy longer-dated USTs in the two-year to 10-year segment.

But the central bank still won’t be buying more than 35 per cent of any single issue. And since it’s already gone through QEasing I, back in 2009, it’s more limited in its choices this time around.

The below chart, from RBC Capital Markets is useful:

The seven-year Treasury rallied the most on the FOMC’s Tuesday statement. But judging from that chart, it looks like the Fed already has significant holdings of that particular security (along with three-years). The 30-year, incidentally, also initially rallied on the statement — before traders realised “longer-dated” wasn’t going to include the issue. Whoops.

Anyway, as for the actual economic impact of the Fed’s QE lite.

RBC’s rate strategist Michael Cloherty (formerly of the BofA parish) reckons not much:

We think the long-term impact on Tsys will very small—NY Fed studies suggest that the $1.75T of purchases was worth roughly 50bps on 10yrs, so a purchase in the $200bn range would only be worth in the mid-single digits on 10yr rates. Since the impact of this announcement has been relatively small, we think market expectations are that the Fed will be forced to go to the next item on its list to stimulate the economy (more explicit commitment to keep rates low, more asset purchases, or cutting the rate on excess reserves).

Related links:
Pondering the MBS paydown – FT Alphaville
Mapping US Treasuries – Here be deflation – FT Alphaville
$1.25 trillion is still real money – Boston Fed discussion paper