Will the FED buy Treasures?‏

MS - Berner
Keeping options open: The Fed will probably buy Treasuries if 10-year Treasury yields approach 3-1/4%, a level that could threaten credit-sensitive demand. Buying MBS and getting the TALF running are priorities, but officials likely want to keep all options open, especially if global investors become skittish about Treasury debt.

Arguments for buying Treasuries: The case for buying will hinge on whether Treasury yields rise further, or spreads over Treasuries stay high or widen. And some officials prefer buying Treasuries to other options because it does not distort relative pricing. The Bank of England's gilt purchase plan shows that such actions can be effective.

Arguments against buying Treasuries: Buying Treasuries would add to the challenges of managing the Fed's balance sheet. Owning Treasuries risks capital losses, and the effectiveness of Treasury purchases is not guaranteed. The perception that the central bank is monetizing budget deficits could compromise the Fed's independence. And pushing Treasury yields artificially low could set the stage for a sizable snapback when the economy turns.

The balance of risks favors buying: Given the ongoing seriousness of the financial crisis, Fed officials will continue to use all tools at its disposal to mitigate the impact on the economy. Buying Treasuries is one of those tools, and the potential benefits of buying Treasuries seem to outweigh their costs, especially given the Fed's need for flexibility.


ML - Rosenberg
We believe the focus is still on mortgages
Although Treasury debt purchases are certainly a possibility in the future, we think in the near-term the Fed will remain focused on mortgages. To that end, we believe it is likely that the Fed will announce an expansion of the mortgagebacked securities buying program which was due to be completed in June. This announcement could come as early as Wednesday’s FOMC statement.

High hurdles to clear
The tone of commentary around Treasury purchases suggests that, although still a possibility, they have become less, rather than more, likely since they were first discussed by the Fed. In December they noted that they were “evaluating the potential benefits of purchasing longer-term Treasury securities.” In January the tone changed as they stated that Treasuries purchases would be done if they“would be particularly effective in improving conditions in private credit markets.”The hurdle seem to be that, for the Fed to purchase Treasuries, yields in the Treasury market must be preventing them from influencing mortgage rates via their MBS buying program. There are as yet no signs that this is the case.

Limitations and methods
Any Fed program to purchase Treasuries would not likely have either an announced rate target or an announced target size. Although the Federal Reserve has significant experience buying Treasuries and would encounter no operational difficulties in the transactions themselves, they would likely start small before growing larger over time. Additionally, they may find it more difficult to limit theexpansion of reserves as they grow their securities portfolio. This could prompt them to return to widespread use of “matched sales” for draining reserves as other recently used methods might work at cross purposes to the goal of lowering Treasury yields.


GS - Hatzius, MsKelvey
The outcome of the March 17-18 meeting of the Federal Open Market Committee (FOMC) is apt to be identical to that of the January 27-28 meeting. In particular, while we see several reasons why Treasury purchases make even more sense now than they did then, the FOMC appears disinclined to take this step yet. Meanwhile, it will reaffirm its expectation that the federal funds rate target will remain at its low level for “some time.”

· In this comment, we review the arguments for and against the purchases of Treasury securities, focusing on changes that have occurred since late January. On the “pro” side, we find five points: (1) the economic news has been worse on balance since then, particularly in the labor market; (2) to counter the loss of the funds rate as a policy tool, the Fed needs to expand its balance sheet sharply—possibly by as much as $10 trillion according to some very rough calculations; (3) this means all options should be on the table—i.e., the FOMC should resist its inclination to focus on one program at a time; (4) financial conditions have tightened in spite of the Fed’s actions to date; and (5) last week’s purchases of longer-dated securities by the Bank of England have yielded impressive, if limited, success thus far.

· Set against these considerations are three observations: (1) the data on consumer spending have been encouraging, especially the latest figures; (2) financial conditions have turned for the better in the last week; and (3) Fed rhetoric has been less supportive of the Treasury purchase option in recent weeks than it was before the January meeting. This last point is key—if officials have been disinclined to buy Treasuries throughout this period, the upbeat developments of recent days are unlikely to produce a change in heart, much as we think such a change makes sense.