US – FEDs Repurchase $300-$400 Billion Loans

With the FOMC announcement just one day away, the market consensus is that we’re getting Operation Twist. The key question remaining is the size and composition of the twist.

Economists at Goldman Sachs said in a note late Monday that they expect the Fed, in increasing the average maturity of its bond holdings to stimulate the economy, to purchase a net $300-$400 billion in 10-year equivalent debt — i.e., taking on the same amount of duration risk as $300-$400 billion of the current 10-year Treasury note.

The Fed owns $266 billion in Treasury notes and bonds that mature before the end of June 2013 — over the period during which it has signaled to keep rates exceptionally low — and another $232 billion that mature over the following year, Goldman notes.

“We expect the Fed to sell some portion of these holdings — perhaps $300 billion or so — and purchase securities with 7 to 30 years remaining maturity,” Goldman economists say.  Goldman also thinks the Fed will cut the interest it pays banks on excess reserves — though it adds this is “a much closer call.”

Source: The Wall Street Journal


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