The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion (Dh10 trillion) balance sheet to keep interest rates low.
While the $600 billion purchase programme, known as QE2, winds down, the Fed said last Wednesday that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt in the next 12 months without adding money to the financial system.
The central bank, which injected $2.3 trillion into the financial system after the collapse of Lehman Brothers Holdings in September 2008, will continue buying Treasuries to keep market rates down as the economy slows. The purchases are supporting demand at bond auctions while US President Barack Obama and Republicans in Congress struggle to close the gap between federal spending and income by $2 trillion and $4 trillion.
"I don't think the Fed wants to remove accommodation in any way, shape or form," said Matt Toms, the head of US public fixed-income investments at Atlanta-based ING Investment Management, which oversees more than $500 billion. "It's quite natural for them to reinvest cash," he said. "That effectively maintains the accommodative stance."
A total of $112.1 billion of the Fed's government bond holdings will mature in the next 12 months, 7 per cent of the $1.59 trillion in Treasuries held in its system open market account, known to traders as Soma. Replacing those securities will require the Fed to buy an average of $9.4 billion of Treasuries a month through June 2012. The Fed also held $914.4 billion of mortgage-backed debt and $118.4 billion of debentures.