Fed to Stop Purchasing US Treasuries. Is it too early?

In the United States, since the beginning of quantitative easing policy, the Federal Reserve has bought $260bn worth of the Treasuries in order to improve credit conditions. However with the Fed’s buying program almost over, questions arise about the sustainability of the ongoing recovery in financial markets.

So far the Fed purchasing of US Treasuries seem not to have any positive impact on the yield curve. For example, since March the average yield on US government obligations went actually up, with the 30 year bond yield going from 3.64 in March to 4.51 in August. Moreover, buying of treasuries is only one part of the quantitative easing program. In fact, the Fed has still around $600bn worth of Agencies and Mortgage Back Securities paper to purchase.

Also, although the supply of Treasuries is much bigger than last year due to an extensive government spending program, sales are going quite well. For instance, so far this year over $79bn of 30 year bonds were sold in 6 auctions. In comparison, last year only 4 auctions worth $48bn took place. Moreover, foreign holdings of US long term obligations have increased in spite of the global downturn. In June, they were 31% higher from the same period last year and treasuries demand was strong especially from countries with significant trade surpluses (China and Japan). In addition, because of limited alternatives for investments, the domestic private sector buying of Treasury has grown since the beginning of the crisis, with financial institutions increasing their holdings by $400bn and households by $300bn. So, at Trading Economics, we think the end of the Fed buying program of US Treasuries will not have a significant impact over the credit availability and performance of US financial markets.

Anna Fedec, contact@tradingeconomics.com
8/22/2009 1:32:25 PM