QE2 - As expected, BUY belly SELL long end

QE2 - Buy the belly, sell long end


On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011.

The FOMC also directed the Desk to continue to reinvest principal payments from agency debt and agency mortgage-backed securities into longer-term Treasury securities. Based on current estimates, the Desk expects to reinvest $250 billion to $300 billions over the same period, though the realized amount of reinvestment will depend on the evolution of actual principal payments.

Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.

The Desk plans to distribute these purchases across the following eight maturity sectors based on the approximate weights below:

Nominal Coupon Securities by Maturity Range*    TIPS**

Nominal Coupon Securities by Maturity Range*
 TIPS**

1.5-2.5   2.5-4   4-5.5  5.5-7   7-10   10-17   17-30  1.5-30
 Years   Years   Years  Years  Years   Years   Years   Years

    5%     20%     20%    23%    23%      2%      4%      3%

*The on-the-run 7-year note will be considered part of the 5½- to 7-year sector, and the on-the-run 10-year note will be considered part of the 7- to 10-year sector.