By Jonnelle Marte
(Reuters) – The U.S. Federal Reserve on Friday launched a wave of $37 billion of Treasury security purchases under the enhanced market liquidity measures it announced on Thursday to address volatile conditions in the government bond market caused by the coronavirus outbreak.
The Federal Reserve Bank of New York, the market agent for the Fed system, said it was targeting five different maturity sectors in a series of purchases on Friday.
The purchases account for roughly half of $80 billion in planned monthly purchases that the Fed adjusted this week to include a wider range of maturities. That was a notable shift from its previous approach, which focused on short-term Treasury bills and was described as a “technical” program aimed at boosting the level of reserves in the banking system.
The accelerated purchases are “intended to address highly unusual disruptions” in the Treasuries market caused by the coronavirus outbreak,” the New York Fed said.
An initial rally in Treasury prices on the announcement faded as traders realized the Fed was not rolling out new bond purchases, Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets, said in a note.
It was the latest move by the Fed to keep financial markets operating smoothly. On Thursday, it announced $1.5 trillion in short-term loans available to dealers, the third time this week it has increased the cash available in short-term lending markets.
Dealers took up $119 billion of one- and three-month loans from the Fed, less than 10% of the funding available. But the substantial offering sent a message of support to markets, analysts said.
“By offering such huge dollar amounts, the Fed is effectively saying ‘we will provide whatever amount is demanded,'” Bill Nelson, chief economist at the Bank Policy Institute and a former Fed official, wrote on Friday.
The New York Fed said it will adjust purchases “as needed to foster smooth Treasury market functioning” and plans to post a revised schedule.
Fed officials cut interest rates by half a percentage point last week in an emergency action meant to protect the U.S. economy from the outbreak’s effects. Investors expect them to cut rates to zero at next week’s policy meeting.
The decision to purchase a range of maturities has opened debate over whether the Fed will return to quantitative easing, or the large scale asset purchases it made to stimulate economy after the financial crisis.
“The implicit question quickly becomes what else could the Fed ‘possibly’ do to counter the strains evident in the market? QE by its real name?” strategists for BMO Capital Markets wrote.
(Reporting by Dan Burns and Jonnelle Marte; Editing by Chizu Nomiyama, Diane Craft and Richard Chang)