Fed Will Purchase “Approximately” $80BN In Treasurys Per Month, $40BN In MBS

With traders curious if the Fed will leave open-ended QE or will formalize asset purchases to a specific monthly amount, the Fed left it somewhat open-ended, with the Fed statement saying “the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning”, however in a separate Operating Policy note from the NY Fed, we read that:

• the Desk plans to continue to increase SOMA holdings of Treasury securities at the current pace, which is the equivalent of approximately $80 billion per month

and:

• the Desk plans to continue to increase SOMA holdings of agency MBS at the current pace, which is the equivalent of approximately $40 billion per month

In other words, while not explicit, one can expect the current run-rate of about $4BN per day/$20BN per week in TSY purchases to continue. It also means that, all else equal, the Fed will monetize just under $1 trillion in Treasury per year at the current pace, which however may be less than the market was expecting in light of the massive debt issuance on deck.

Commenting on this, Grant Thornton economist Diane Swonk said that “Acting on mortgage-backed securities and Treasuries underscores their belief that more support is needed….The Fed does not see a victory in the employment bounce-back. The risk of deflation is still high and the economy needs more support to heal more fully.”

The NY Fed also said that “Treasury purchases will be conducted on a monthly basis, starting with the period from mid-June to mid-July, and will continue to be conducted across a range of maturities and security types.  The Desk will continue to roll over at auction all principal payments from SOMA holdings of maturing Treasury securities.”

Separately, for MBS, the NY Fed said that “Agency MBS purchases will be conducted on a monthly basis, starting with the period from mid-June to mid-July.  Total purchases during this monthly period are expected to be approximately $96 billion, which includes approximately $56 billion in purchases to reinvest principal payments from existing SOMA holdings of agency debt and agency MBS anticipated to be received in the month of June.  Agency MBS purchases will continue to generally be concentrated in recently produced coupons in 30-year and 15-year fixed rate agency MBS in the To-Be-Announced (TBA) market.”

The statement also adds that going forward, POMO schedules won’t be handed out every Friday, but will switch over to a once a month event:

The Desk will announce the planned monthly amount of Treasury and agency MBS purchases on or around the ninth business day of each month and will release tentative schedules of purchase operations twice a month, on or around the ninth and the nineteenth business days.  The first monthly purchase period will begin on June 12, 2020 and continue through July 13, 2020.  Updated information on purchase amounts and schedules can be found on the Treasury Securities Operational Details and the Agency MBS Operation Schedule pages.

In addition, the Desk will continue to buy agency CMBS at the current pace by conducting weekly operations of approximately $250 to $500 million with purchases including the reinvestment of principal payments from SOMA holdings of agency CMBS.”

Finally, in picking a line from the ECB, the NY Fed said that consistent with the FOMC directive, the Desk is prepared to increase the size and adjust the composition of its purchase operations as needed to sustain the smooth functioning of the Treasury, agency MBS, and agency CMBS markets.”

In short, this is about as close to a full commitment to debt monetization as the Fed is ready to go.