What's happening in monetary policy and macroeconomics.
Monday, November 8, 2010
You probably know this, but in my quest for information on QE2 on the New York Fed web site, I found all the details of the Fed's security holdings. The statement on the details of how QE2 will be carried out is here. Then, if you go here, you get the a complete listing of the SOMA (System Open Market Account) Treasury and agency security holdings. This gives you the details of the quantities of each issue held, and how much of the total issue is in the SOMA. This will be interesting to watch in the coming months as QE2 unfolds. Note that the planned monthly purchases will account for a large fraction of the quantity of debt the Treasury will have to issue, on average, each month to finance the federal deficit. I'm guessing that the open market desk always purchases newly-issued Treasuries, i.e. "on the run," but I'm not sure. Anyone know?
Posted by Stephen Williamson at 7:21 PM
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they should stop issuing treasury securities and use their newly granted ability to pay interest on reserves held at the fed to support any future positive interest rate they might deem necessary.ReplyDelete
The FED buys both on the run and off the run USTs. From what I can tell, they are pretty savvy and buy the best value they are offered. They try to avoid the cheapest to deliver issues for futures contracts. Here is a list of their last 10 operations: http://is.gd/gR51bReplyDelete
It looks like they bought only 2% of the latest issues of 2's, 5's, and 7'. They hold higher percentages of high coupon, aged paper. It makes sense that they would buy cheaper, less liquid issues; but, whether they are being savvy and getting good value or whether they are paying too much for illiquid inventory to support the primary dealer community is unclear. By design, there is no way to evaluate FED performance.ReplyDelete
Thanks. Here's another question. Apparently liquidity is not determined just by time to maturity. On-the-run and off-the-run seems to matter for prices, and the idea is that this reflects liquidity premia. What explains that?ReplyDelete
LTCM, using enormous leverage, arbitraged this spread (...it declines the closer you get to maturity).ReplyDelete
Is the market observably thin in off-the-run Treasuries?ReplyDelete
You can probably earn a 1-3% annual return by arbitraging the spread, but if you lever up your investment 40-50 times (LTCM) you can get a very nice return. Works well during calm periods, but a crisis will annihilate your fund.ReplyDelete
Sometimes thinness is very observable. Here is a must-see video of the term structure of treasury interest rates over the recent past.ReplyDelete
These things are all important, and I think relevant for how we think about QE.ReplyDelete
At times off the run liquidity can be poor like after the Lehman bankruptcy or the most notorious case after LTCM in the late 90s. Currently, there is deep liquidity in most issues especially since there aren't as many squeezes as before and arbs are comfortable shorting issues.ReplyDelete
It used to be that the active on the run issues traded at a premium both because of their better liquidity but also because they were more prone to being squeezed.ReplyDelete
There currently doesn't seem to be much of a premium for active issues. Active and off the run issues are trading rather efficiently. The only anomalies I have noticed recently have been driven by future contracts and their effect on their deliverable basket.