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Authorized for public release by the FOMC Secretariat on 8/21/2020

BOARD

OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON,

D.C. 20551

July 9, 1974

CONFIDENTIAL (FR)
TO:

Federal Open Market Committee

FROM:

Arthur L. Broida

Enclosed is a memorandum from the System Account Manager
dated today and entitled "Outright System Activity in the Agency

It is contemplated that the recommendations contained in

Market."

the memorandum will be considered at the meeting of the Committee

to be held on July 16, 1974.
Attached to Mr. Holmes' memorandum is a memorandum by Mr.
Ozog of the New York Bank which reviews outright System operations
in agency issues since their inception in September 1971.

Mr. Ozog's

paper was prepared partly in response to an informal suggestion by
President Eastburn several months ago that a review of the System's
experience with agency operations would be desirable from time to time.

Enclosure

Authorized for public release by the FOMC Secretariat on 8/21/2020

July 9, 1974

CONFIDENTIAL (FR)

TO:

Federal Open Market Committee

FROM:

Alan R. Holmes

SUBJECT:

Outright System Activity

in the Agency Market

Nearly three years of Desk experience with outright operations

in the agency market have shown that these transactions are a valuable
tool for implementing monetary policy.

The Desk has been an active

participant in the agency market and the operations have contributed
significantly to our flexibility and efficiency in responding to
reserve needs.

In frequency and magnitude, agency transactions approx-

imate our operations in Treasury notes and bonds.

The market's ability

to accommodate System activity has met our expectations and in turn the

System has contributed something positive to the market's over-all performance.

Desk transactions in the agency market are demanding of

time and energy but the operational burdens have not materially diminished the usefulness of the technique.
Beginning in September 1971, the System has constructed a
modest portfolio of agency securities which, at the end of June 1974,
totaled $2.9 billion or 3.5 per cent of the System's outright holdings
of Treasury and agency securities.

The portfolio is relatively well

balanced in terms of maturity and issuer representation.

While the

portfolio is not a perfect reflection of the array of issues eligible
for purchase, the portfolio is well proportioned, given the constraints
of availability in the market, reserve objectives, and Committee guidelines.

Authorized for public release by the FOMC Secretariat on 8/21/2020

The rules for operations established by the Committee in 1971
have served Desk activity well and System transactions have not resulted
in our domination of the market nor produced distortions in the market.
In light of the System's experience to date, however, it is timely to
consider certain modifications in the Committee's guidelines in order
to increase the usefulness of agency operations.

Specifically, the

Desk would find it advantageous to be able to roll over maturing agency
issue holdings and also to purchase new securities as early as the issue
date rather than two weeks after issue date as is now stipulated in the
guidelines.

Rolling over maturing issues (as we typically do with

maturing Treasury coupon issues) would avoid the negative reserve impact
that automatically ensues when issues are redeemed.

The 1971 guidelines

precluded Desk participation in other than "seasoned" issues, but this
expression of concern over the possibility that the System would unduly
influence the primary distribution of agency securities, while appropriate in the case of a new and untested operation, no longer appears
warranted.

The ability to purchase new agency issues on the issue date

would increase the availability of agency issues for purchase by the
Federal Reserve since the most active market trading is usually in the
most recent issues.

Such operations would generally parallel our

operations in Governments where, under "even keel" considerations, we
have generally avoided operations before payment date, which is the
same as issue date.

Authorized for public release by the FOMC Secretariat on 8/21/2020

Therefore, I recommend that the guidelines be amended to
permit the roll-over of maturing holdings and to authorize the purchase
of new securities on the issue date.

If these amendments are made, we

could proceed to specific discussions with the various issuers of agency
issues, in order to work out the details of roll-over procedures.
The following changes in the present guidelines which were
approved by the Committee on August 24, 1971,

and revised on

February 15, 1972, April 17, 1972, and April 17, 1973, would accomplish
the desired purpose:

Delete guideline 4 which reads, "System holdings of
maturing agency issues will be allowed to run off at
maturity." The authority to roll over maturing agency
securities is already contained in paragraph 1(a) of the
authorization for domestic open market operations which
reads in part, "to exchange maturing U.S. Government and
Federal agency securities with the Treasury or the indi-

vidual agencies or to allow them to mature without
replacement."
Delete guideline 7 which reads, "No new issues will
be purchased in the secondary market until at least two
weeks after the issue date." The authority to purchase
agency securities would then be derived from paragraph 1(a)
of the authorization for domestic open market operations
which reads in part, "To buy or sell...securities that
are direct obligations of, or fully guaranteed as to

principal and interest by, any agency of the United States
...., on a cash, regular, or deferred delivery basis."
While this authorization would technically permit the
Desk to purchase agency issues early in the "when-issued"
period when the securities are still undergoing their
initial distribution, the Desk generally would not plan
to buy the new issues at such times--just as it refrains
from purchasing new Treasury securities during their

initial distribution phase.

Authorized for public release by the FOMC Secretariat on 8/21/2020

-4-

I have attached a report which reviews the System's outright

activity in the agency market since operations were commenced during
September 1971.

Attachment

Authorized for public release by the FOMC Secretariat on 8/21/2020
FEDERAL RESERVE BANK
OF NEW YORK

MISC. SB

OFFICE CORRESPONDENCE
June 28, 1974

DATE

FROM

Subect:

Holmes

Mr.
To

Market Committee

meeting on August 24,

guidelines

for

purchasing $61

outright

Briefly,
authority was

operations

folio
The

the form of

1971

This

decision
conducted

1971,

securities by

report provides

the accompanying

through June

tables,

using

the maturities

of

and bonds.

for purchase although

it must be

in rough proportion

the

the

debt of

to the amount of

since

as

frequently

System has

distribution which

total volume

is proportionately heavier in
also acquired

The

a maturity

the

that

relatively active in

the new technique about

in Treasury notes

System has

1974.

the accompanying data reveal

a modest portfolio with

agency has

This

On September 23,

granted, the Desk has been

the agency market,

eligible

and sales of

in agency

operations

million in the market.

from September

approximates

1971.

Open

nature and extent of outright System operations

regarding the

acquired

Federal

under which Desk operations would be

information, mainly in

in agencies

the

System Account.

the

were made public on September 16,
the Desk commenced

1971,

outright purchases

authorized

Federal agency securities
and the

1974

June

Edward J. Ozog
At its

as

Review of Outright System
the Agency
Activity in
Market:
September 1971 -

of securities

noted that

the port-

longer-term securities.
each individual agency

eligible securities each

outstanding.
The Desk's

positive effect on

activity in agency

the

functioning

of

securities has had a

the market, primarily

Authorized for public release by the FOMC Secretariat on 8/21/2020

through

has not significantly

System operations

havior nor noticeably changed

the

as

cause of

a major

this

Treasuries

marketability

in

of securities

a concurrent rise

The

of Treasury

be

operate

in

however, by

the requirement

agency securities have

modifying reserve

in

the authority

to

use of
It

is

issue

recommended

System

that

as

agency

a means

roll-

implementing monetary

consider

authorizing

of agency

transactions and
the Desk

to

as

the Account Management's

of

to roll-over maturing holdings

consider authorizing

The ability

to purchase new securities

the Committee

circumstances warrant such
also

and

date would enhance

agency operations

impaired,

the Desk only purchase issues

which have been outstanding for two weeks.

early as the

availability

flexibility

the agency market is

that

over maturing agency holdings

improved

maturity sector.

this

usefulness of

The

on an outright basis

the

com-

the agency market and

has provided the Account Management with valuable
to reserve needs.

and

the perspective of operations,

the introduction of a new method for

responding

identified

attributed to

financing in

cumbersome from

in

marked narrowing of

sector of

this

Although System dealings in
proven somewhat

agencies

on longer-term agency issues

for example,

can,

the

cannot be readily

development.

the spread between yields
parable

of the market.

favor of

in

System operations

recent years but

influenced market be-

structure

Yield relationships have changed

of

the impact

but

intermittent demand,

the addition of

the

securities when

that

to purchase

policy.

the

any

Committee

outstanding

securities which meet other eligibility requirements.

Authorized for public release by the FOMC Secretariat on 8/21/2020

Volume and Frequency of System Operations
Tables 1 through 3 indicate that the System Account
Management has utilized agency operations as

an important means

of providing for the longer-term reserve needs of the banking
system.

During the 34 months covered by this report,

$3.7 billion

or 42 percent of the total purchases of $8.8 billion of securities
other than Treasury bills were agency securities.

At the end of

June, 1974, the System's outright holdings of agency securities
totaled $2.9
bonds

billion, outright holdings of Treasury notes and

totaled

$42.5 billion, while Treasury bills totaled $37.3 bil-

lion.
The Desk purchased agency securities in the market on
22 occasions,

the same as the number of market purchases of Treasury

notes and bonds.

The Desk purchased agency securities

directly

from customer accounts on 6 additional occasions and purchased
Treasury notes and bonds from these accounts on 12 occasions.
The size of individual purchase operations in the agency
or Treasury note and bond market have been comparable.

While

agency operations have tended to be slightly smaller than Treasury
operations,

the ability of the Desk to supply a substantial volume

of reserves

through outright agency operations has been proven.

The Account Management usually alternates purchases of
securities other than Treasury bills between the agency market and
the Treasury market, although this practice is at times suspended
when availability makes it desirable for the Desk to temporarily
concentrate operations in a particular market.

During the

Authorized for public release by the FOMC Secretariat on 8/21/2020

September 1971 - April 1972 interval, the Desk purchased both
agencies and Treasury notes and bonds frequently in order to
expand reserve availability.

From then until the late summer

of 1973 the Desk became a less active participant in both markets
as the Account Management was a sparing provider of reserves.
Both agencies and Treasury notes and bonds were purchased frequently to help expand reserve availability after the summer of
1973 but sales of coupon-bearing securities by customer accounts
were a major factor in satisfying the System's need to acquire
longer-term securities.

Since October 1973 agency operations were

concluded in the market on seven occasions but, given the sizable
availability to the Desk of Treasury notes and bonds from foreign
official accounts, the Desk purchased Treasury coupon-bearing
securities in the market on only three occasions.
On two occasions during 1972

the Desk sold moderate

amounts of near-maturity agency issues in order to contribute to
the task of absorbing sizable amounts of reserves.

In part the

operations were an experiment in the feasibility of selling couponbearing securities, a technique which the Desk has not used in the
Treasury market in over 10 years.

Both operations proved success-

ful but, although sales of near-maturity agencies can be useful in
arranging reserve absorptions

for times when they fit better with

System reserve objectives, sales of coupon-bearing securities are
technically not too satisfactory a means of absorbing a large
volume of reserves.

It should be noted that because of redemptions

Authorized for public release by the FOMC Secretariat on 8/21/2020

and

sales

were up

The

(which would have

only

$2.9

soon become redemptions)

billion compared with purchases

Composition of

effects

of particular
specified

Federal

holdings

of $3.7 billion.

the System Portfolio

In order to avoid System dominance of
undesirable

our

on market behavior

agencies

or sectors

of

or

the market,

for operations

The guidelines

the

agency issues,

as

last

agency market,

the appearance of

certain guidelines
for

the

in

the

support

FOMC has

the market.

conduct of System operations in

revised on April 17,

1973,

are as

follows:
1.

System open market operations in Federal agency issues
are an integral part of total System open market operations designed to influence bank reserves, money market
conditions, and monetary aggregates.

2.

System open market operations in Federal agency issues
are not designed to support individual sectors of the
market or to channel funds into issues of particular
agencies.

3.

System holdings of agency issues shall be modest
relative to holdings of U.S. Government securities,
and the amount and timing of System transactions in
agency issues shall be determined with due regard for
the desirability of avoiding undue market effects.

4.

System holdings of maturing agency issues will be
allowed to run off at maturity.

5.

Purchases will be limited to fully taxable issues for
which there is an active secondary market.
Purchases
will also be limited to issues outstanding in amounts
of $300 million or over in cases where the obligations
have a maturity of five years or less at the time of
issuance, and to issues outstanding in amounts of
$200 million or over in cases where the securities
have a maturity of more than five years at the time
of issuance.

Authorized for public release by the FOMC Secretariat on 8/21/2020

at any one

of any one issue

System holdings

6.

time

will not exceed 20 percent of the amount of the
Aggregate holdings

issue outstanding.

of

the

issues of any one agency will not exceed 10 percent of
agency.

that

7.

No new issues will be purchased in the secondary
market until at least two weeks after the issue
date.

8.

All outright purchases, sales and holdings of
agency issues will be for the System Open Market
Account.

The Account

of best price and in relation

offerings

to

the Trading Desk.

objective
type of

in mind,

market

however, that

The

are a prime determinant

System has

fairly well balanced in terms

sented.

composition of

availability of
con-

the System portfolio

in the market.

the

on

While the Account Management

forces

security purchased

been such,

to the

composition of

operations with the

ducts

agency securities

Management purchases

the basis

is

issues of

amount of outstanding

the

Market

of

an

the

forces have

acquired a portfolio that

of maturity

the portfolio is

and agencies

repre-

described in Tables

4

through 6.
held by the

The maturities
securities

due

securities

eligible

less

than

in 5 years

for purchase

five years,

matures within

or more.

Also,

ble agencies mature within a year
issues
ship

in proportion

of 1 to

While

at the

only 61 percent

five years.

to

the

of

74 percent of

end of
the

the

June 1974

System's

agency

mature in

portfolio

even though 24 percent of

eligi-

the System has not acquired

amount eligible

5 year maturities is

towards

System are weighted

for purchase.

similarly moderate.

these

Owner-

Authorized for public release by the FOMC Secretariat on 8/21/2020

One

reason

longer-term issues
meet relatively
to

is that

agency purchases

long-term reserve
is

roll over maturities

the value

needs.

The Desk's

reference

to

sector of

the market

this

prevailing market

sector offer

Treasury

diminishes

often cause undesirable reserve absorptions

The relatively heavier

issues.

conditions.

is well developed

little

the

which

can also be explained

of longer-term maturities

to

inability

in the portfolio since

the Desk must offset through operations.
holdings

toward

were being used

a factor which particularly

of short-term securities

redemptions

System's purchases

for slanting the

through

The shorter-term

and active

and yields

in

incentive over comparable maturities of

Longer-term agency

issues, on

the other hand,

have offered a distinct yield advantage over similar Treasury
issues.

By leaning

has been

able

was

toward longer

to broaden the

issues,

demand for

relatively more useful in

fostering

the Account Management

agency

issues where this

development of

the

agency

market.
The

System's portfolio

is

fairly representative

of the

amount of securities each individual agency has outstanding after
consideration
for

given to

purchase as well

standing
cent of
nine

is

months.

agencies

as market

securities of
the

the maturities
factors.

the COOP

securities eligible

and

of securities eligible
For example,

FICB, which represent

for purchase,

are mainly

Given the Account Management's policy of

for longer-term reserve effects

with which purchases

of these

the out-

and given the

issues must be

redeemed,

12.7 perdue within

purchasing
frequency
only about

Authorized for public release by the FOMC Secretariat on 8/21/2020

one percent of the System's portfolio is in securities of
agencies.

these

Over 50 percent of the eligible securities are obliga-

tions of the FNMA and FHLB but 69 percent of the System's portfolio is composed of these obligations.

In part, this represents

a substitution of these readily available issues for the COOP and
FICB issues which have not been frequently purchased.

Holdings of

FNMA securities are proportionately large while holdings of FHLB
securities are proportionately small.

Here, it appears that the

large volume of FNMA securities, about 30 percent of total eligible securities, has increased their market availability and probably
their yield in relation to FHLB securities.

Moreover, a greater

proportion of FHLB securities are shorter-term securities.

Holdings

of GNMA participation certificates are proportionately relatively
low since this type of security has not been issued since 1968.
The market supply of the GNMA participation certificates is usually
small and market yields

are not attractive.

Holdings of most of

the agencies less active in the market, such as the Export-Import
Bank, Postal Service and Washington Metropolitan Transit Authority
are proportionately sizable
not as developed as

since the market for these

issues is

the market for the older agencies and consequently

yield values have usually been attractive.

Holdings of Farmers Home

Administration securities are consistent with outstandings.

While

certain uncommon technical characteristics of these issues have made
the Desk reluctant to handle large transactions in these issues,
the offsetting high yields available have prompted the Desk to
purchase an amount in proportion to the amount eligible.

Authorized for public release by the FOMC Secretariat on 8/21/2020

Operating

Experience
System purchase operations

conducted in much
obligations.
all

dealers

issue and
limited
buying

Using

the

as

go-around technique,

a large number of individual

before

there has

acquired but

of issues

to

embarking on

purchase operations

execute

are purchased.
mainly by

the

the

The

difficulty

large number of

process

the Desk attempts
activity permits.
circumstances

Management prefers

and

operation with the

dealers

closing
A

The

is

In succeeding

to limit

is

issues

times

case

until

the number

proven

required

to

case when Treasury issues

in agency operations

the market

in this

to enable

operations have

the

avoided

is

caused

eligible for purchase.
requires much

the Desk
later

as

other

trading

is forced by operating

than

the Account

the Desk may not

shortly

time,

after

conclude

an

the market's

time of 3:30 p.m.

recent

go-around,

representative of an
2:15

in order

to enter the market as early

to approach

Desk

short maturities have

of purchasing agencies

However, at

contacts

offerings by

the

considerable more time

operation than

an agency

and

Treasury

go-arounds were

two

been no attempt

cumbersome
complete

the Desk

are

experience in handling

in many operations

and

of

full-scale operations.

from the go-around.

to

issues

gain some

been excluded

normal

the first

the maturity range

the Bank's accounting staff

Because

outright purchases

Purchases during

only part of

the issues

the agency market

virtually simultaneously and requests

price.

to

the same way

in

p.m. and were

agency

conducted on March 21,

operation.

told the Desk was

1974,

is

Dealers were contacted

at

soliciting offerings of all

Authorized for public release by the FOMC Secretariat on 8/21/2020

eligible agency issues due in 1977 or longer.
restricted to

those issues mainly because

The

about

request was

180 individual

issues were eligible for purchase that day and it was not considered

issues
range

feasible

to handle potential offerings

submitted by all the dealers.
specified

of that many

Nevertheless, the maturity

included 97 issues.

By 3:00 p.m. all dealers had submitted offerings which
totaled slightly more than $1 billion.
of the Open Market Function began
the best

relative yields.

of virtually all
issue were

eligible

submitted over

minutes were consumed by

This

Immediately, the officers

to choose issues which provided

task was difficult since

issues were

offerings

received and prices

a wide range.

In this

for

case about

each

45

the process of determining and comparing

yields, and deciding which offerings should be purchased within
available leeway margins.

The $170

million of securities

purchased

that afternoon was comprised of 78 individual items.
An operation
Desk asks dealers

takes up

for offerings

to two
and

hours

the

time

from the

time

that dealers

the
are

notified whether their offerings are accepted or rejected.
time does
entering
tickets.
issues

not

include

the

the market nor

preparation for

and amounts eligible

of go-around

forms providing

and yields.

The

deliveries.

processing

trade

accurate determination of all

for purchase
essential

as well as

current

and

accounting which was

inception of agency operation has been

the

organization

information on

requires preparation of

all accounting procedures
The manual

operation before

the processing of a large number of

Preparation requires

completion of

an

This

tickets,

prices
the

the receiving of
necessary at the

converted to computer but

Authorized for public release by the FOMC Secretariat on 8/21/2020

the

accounting for

for

dealings

to borrow.

Of

the

78 items

purchased

due the

taken as

substitutions.

temporary

difficult

22 items were

on March 21,

next day and other securities were

not delivered when

were

agency securities are

problem since many

been a constant

delivery have

Delays in

in Treasury securities.

complex than

more

agency transactions remains

cleared up by April 10,

but

these substitutions

Most of
the

of the

last

securities was

not delivered until May 8.
in agency

Despite the burdensome aspects of dealing
the Desk's

securities,

experience has been

generally

good and

the ability to affect reserves

through this medium outweighs

any technical disadvantages of

operations.

capable of

providing

the depth needed for

consistently offered

Dealers have

on request

of securities

and

greater effect

levels.

individual operations

inhibited

operation,
in dealings

likely

Moreover, while the

the market

for

Desk may

thin markets

to move sharply in

these constraints
in

comparable

varies with market

the Desk has not experienced any

from operating when

markets are

than

While

for Treasury coupon securities.

the impact of

from operations.

the whole

System operations

on market price levels

the market

time,

volume

the Desk a substantial

operations in

at the

System operations.

at prices which are on

consistent with prevailing market
have no

The market has proved

are

no

greater

Treasury

disruptive effects
at times

develop

response

conditions

to

than

feel

or when

the

a System
those

experienced

coupon securities.

Authorized for public release by the FOMC Secretariat on 8/21/2020

Market Performance
The performance of the agency market at the time of the
FOMC decision to authorize outright purchases by the System Account
had clearly reached a satisfactory state of development which
warranted Federal Reserve participation.

Trading was active,

dealers maintained sizable positions and in general the market
exhibited the depth, breadth and resiliency expected from a
mature

and efficient market.

tion the market has continued
satisfactory performance.
to this

Over the years of System participato display the characteristics of

The extent of the System's contribution

performance is difficult to identify, however.

Surely the

Desk's purchase of nearly $3 billion of agency securities contributed
to the ability of the agencies

to sell approximately

of securities during 1972 and 1973.

$31 billion

Furthermore, the market's

cognizance of a major source of potential demand, as well as the
enhanced stature of the market conferred by System participation
must be

considered an asset.
Among the indicators of market performance which might

be expected to reflect
of yields on agencies

System participation is

the relationship

to yields on comparable Treasury securities.

Normally agency securities yield more than Treasury securities
but the yield spread between similar maturities in each market
fluctuates considerably.

Although it has been said that the

credit status of each security accounts
in spreads this factor appears

for some of the disparity

to be minor especially when one

considers that many agency securities are obligations of the

Authorized for public release by the FOMC Secretariat on 8/21/2020

United States Government and the remainder are essentially backed
by the integrity of the Federal Government which sponsors their
activity.

Two important factors affecting yield spreads

marketability and relative supply.
securities is
issues.

are

The market for Treasury

obviously larger and broader than that for agency

Consequently, the value

to the investor of engaging in

a market which may be more reliable should be reflected in the
price of Treasury obligations.

Since investors usually prefer

Treasuries over agencies if yields are equal, it requires some
yield advantage to entice investors from the former to the
latter.

When agencies are in abundant supply relative to the

availability of Treasuries, the yield spread will increase and,
when agencies are scarce relative to Treasuries, the yield spread
will narrow.
Table 7 uses data derived from spreads published by
Salomon Brothers as an illustration of the yield relationships
which have existed in recent years.

The data clearly indicate

that recent yield spreads are narrower than those that existed
before System participation.

However, the relatively large

spreads which existed before the commencement of System participation were mainly the result of a sizable expansion of agency
financing beginning in 1966.

The market eventually began to

adjust to the increased demands of the agencies, as investors
learned

that agency securities

marketable as

in general are practically as

Treasuries and the agency market often performs as

well or better.

The longer-term sector of the market in particular

Authorized for public release by the FOMC Secretariat on 8/21/2020

has

expanded considerably in

increased marketability has
sell these

securities.

terms

overall activity and this

diminished the yield required to

Moreover,

somewhat more homogeneous

of

in

agency securities have

recent years

and issues with unusual

characteristics

limiting their value

provided

System probably has helped reduce

but

it

given

by

the

is nearly
the

impossible

to

general improvement

are

quantify
in

become

not common.

The demand

yield spreads

the impact

the marketability

of this
of

factor

agency

securities.

Operating Guidelines
The FOMC
activity in

the

guidelines which have

agency market

from an operating standpoint.
approximately
the

44 percent

exceed 10
agency.

percent of

have been generally
At

of the

stipulation that holdings

June

1974,

$3.7

billion of agencies

total

of any

one

issue

its

securities

approached

Holdings
the

under

this

case
of

10 percent

and only

securities

is

the stipulation that

i.e.,

least

rule.

issues

a few
of

outstanding for

not

at the end of

an additional

Moreover, the

System

than 20 percent

of any

other holdings approach

two relatively small agencies

restrained the
the

securities

issued by that

outstanding

limit on holdings of

A limitation which has

eligible under

agency's

limit of holding no more

in only one

this limit.

issues,

one

satisfactory

the System owns

securities

the System could purchase at

reached

however,

present,

the outstanding securities

Based on eligible

has

directed the Desk's

a single

issuer.

Desk's

activity,

System only purchase seasoned
at

least two weeks.

This

Authorized for public release by the FOMC Secretariat on 8/21/2020

requirement

is embodied in guideline 4 which states,

holdings of maturing agency
at maturity",
be

and

purchased in

after

guideline 7 which

states,

4 was

included mainly

no established procedures

maturing agency

issues.

However,

this

to

domestic

open market operations was

apply only

established

maturing agency

debt,

as early

that

in order

the

to

apparently with

for

as March

similar

channeled

7 was

Committee deliberated

authorization
the

as

avoid

same

for
time

the

for exchange of

a view to

the possibility
to allow

for
agencies.

counsel expressed

the

arrangements whereby new

System portfolio

included

the basis

for policy

for

it accepted staff arguments

restricted

originally

on an

exchange

basis.
Guideline

agencies

rolling-over

provide

1971, Committee

into the

reasons

undertaken with the

the law would permit special

issues may be

new

technical

amended at

rolling-over maturing issues would be

far

for

in time discussion of practical procedures

view

off

two weeks

guideline was

temporarily and

guidelines were

Indeed,

run

new issues will

at least

are available

intended

or

"No

to

date."

Guideline

that

allowed

the secondary market until

the issue

since

issues will be

"System

to

"seasoned" issues

possible--the
the appearance

issue, and ward

fiscal agents,

pricing of
or

that

operations must
to

new issues;
of direct

off possible pressures

and selling

groups

When

the

outright System operations

in order

the fact

reasons.

avoid
in

in

be

affecting--inso-

turn,

this would

System support of any
from borrowing agencies,

or syndicates.

Authorized for public release by the FOMC Secretariat on 8/21/2020

the

However,
guidelines

4 and

warranted in

7 has

without entering

of

reserves,

but the

pressures

since the

such as

the Banks

Credit Banks.

the

as

commenced,

the Desk is not
around the

old issues

in dealer

by

debt

and

tions.

This power would be

to

the

by not purchasing
trading has

relatively more ample
at

times

risk

limited supply

the more

permitting the Desk

purchase new

valuable

of

the

Modification

rolling-over maturing debt would not
System dominance

of

the market

to roll-

securities

flexibility

consistent with

Treasury securities.

in potential

7,

of issue but may

the FOMC

issue date would add

to permit

Federal Intermediate

inventories.

the

to acquire

date

chasing after

Authorization by
over maturing agency

short-term borrowers

guideline

only denied

refrained

Consequently,

after secondary market

several weeks

for

as

regards

new

the attrition

of

time.

of

the

replaced by

be

generally

short

obligations

for Cooperatives and

the market

contribute to market

times

a relatively

frequent
impact on

an undesirable

short maturities because

light in

distorting

only meant

not

the Desk has

In addition,

Moreover,

available

at

securities

maturing

investments must

System's

new issues

supply

times

at

redemptions may

that must be faced within
is

replace

market has

in the portfolio with

the portfolio

to

the Desk

the secondary

from purchasing very

the

avoiding System domination of

attrition

investor demand.

than is

limitation

been a greater

the pursuit of

The inability

market.

by

imposed on Desk activity

restraint

to

as

early

System opera-

Desk's

of the

authority

guidelines

imply an increase

since the

System would

Authorized for public release by the FOMC Secretariat on 8/21/2020

be

only

replacing

decision to

its

on

of new securities
not

reducing its

the bank

demands

to

and on

The Desk,

The

of

be

not materially

automatic

for

example,

for

replacing

conjunction with each

the mechanical hurdles

do not seem to

The

the amount

procedures

be devised in

to

achieving

too difficult.

the guidelines

to acquire new securities

would also

debt.

a financing if an agency is

on the market.

Modifications
Desk

an agency.

to participate in

fiscal agent but

this ability

reserve outlook

offered by

maturing debt would have
agency's

of outstanding agency

roll-over maturing securities would not be

but would depend

may elect

share

in

change

in order

the market on
the

to permit

the issue

functioning

of

date

the market.

The primary distribution of new agency securities

is usually

completed in

and the

date and

the

period between the

therefore

an agency

the Desk would not provide undue

4 and

effects
lines

provide for

the

it must be

are

noted

desired policy

flexibility.

operations

restraints

designed

That
to

is,

for

designed to

support

that

individual sectors

of

of particular agencies;

to undesirable

that

money market

operations

are not

the market or
that

reducing

state

reserves,

and

guide-

remaining guide-

restraints without

influence bank

and monetary aggregates;

into issues

that the

lead

other guidelines

conditions,

funds

support

imposed by

7 may be viewed as a step which could

on the market,

operating

payment

financing.
Although deletion of the

lines

offering date

the

to

channel

the amount and

Authorized for public release by the FOMC Secretariat on 8/21/2020

18

timing of transactions shall be determined with due regard for
the desirability of avoiding undue market effects.

Consequently,

the guidelines would continue to restrict operations to
objectives desired by the Committee.
EJO:PDS/rf

the

Authorized for public release by the FOMC Secretariat on 8/21/2020

Table I

Dollar Volume of Outright System Transactions in Treasury Notes and Bonds
and Federal Agency Securities
(in millions of dollars)

Treasury
Notes & Bonds
Purchases

Purchases

1971 (4 months)

1,142

485

1972

1,582

1,197

1973

1,417 1/

865 3/

953 2/

1974 (6 months)
TOTAL

1/
2/
3/
4/
5/
6/

5,094

Federal Agency Securities
Sales
Redemptions
Net

Increase

485
225

827

-0-

239

626

1,189 4/

-0-

268

921

3,736

145

7326/

Includes $816 million purchased from customer accounts.
Includes $381 million purchased from customer accounts.
Includes $167 million purchased from customer accounts.
Includes $148 million purchased from customer accounts.
Represents sales in the market of $54 million and $91 million of issues
one year on February 22, 1972 and August 24, 1972, respectively.
Redemptions represent 20 percent of total purchases.

June 28,

1974

2,859

due within

Authorized for public release by the FOMC Secretariat on 8/21/2020

Table

II

Frequency and Volume of System Purchases
(in millions of dollars)

Occasions
1971

(4 months)

5

in Market

Federal Agency Securities
Total
Average
Smallest
Purchases
Purchase
Purchase

$

Largest
Purchase

485

$ 97

$ 35

$161

1972

8

1,197

150

83

176

1973

4

698

175

139

229

1974 (6 months)

5

1,040

208

167

309

TOTALS

22

$3,420

Occasions

Treasury Notes and Bonds
Total
Average
Smallest
Purchases
Purchase
Purchase

Largest
Purchase

6

$1,142

$190

$104

$263

1972

10

1,582

158

76

217

1973

3

601

200

196

207

3

573

191

176

207

22

$3,898

1971

1974

(4 months)

(6 months)
TOTALS

June 28,

1974

Authorized for public release by the FOMC Secretariat on 8/21/2020

Table III

Dispersion of System Purchase Operations

LEGEND:
T - Purchase
T - Purchase
A - Purchase
A - Purchase

Treasury notes and bonds in the market.
Treasury notes and bonds from customer account.
agency securities in the market.
agency securities from customer account.

1971*

1972

January

T TA

February

T

March
April

1974**

1973

TTA
T

A

TTA

T

A

T TA

T

AA

T

A

T

A

A

May
June

T

A

T

A

TT

A

July
August
September

TT

A

October

A A

November

TTTAA

December

T

TTTAA

A

TTTAA

* - Covers only 4 months.
** - Covers only 6 months.

June 28,

1974

Authorized for public release by the FOMC Secretariat on 8/21/2020

Table IV

Maturity Distribution of Outright System Holdings
of Federal Agency Securities
(in millions of dollars)

Maturity

12/31/71

12/31/72

12/31/73

6/30/74

%

0 -

1 year

210

239

415

459

16

1 -

5 years

181

612

787

1,274

45

5 - 10 years

61

269

497

754

26

Over 10 years

33

191

239

371

13

485

1,311

1,938

2,858

100

TOTAL

Agency Securities

Eligible for

Purchase

by System Account

Eligible
Securities
6/30/74
0 -

1 year

15,861

24

1 -

5 years

32,911

50

5 - 10 years

10,502

16

6,287

10

65,561

100

Over 10 years
TOTAL

June 28,

1974

Authorized for public release by the FOMC Secretariat on 8/21/2020
Table V

Outright System Holdings of Federal Agency Securities
(in millions of dollars)

Percent
of

12/31/71

HOLDINGS
12/31/72 12/31/73

COOP

23.8

-0-

FICB

121.9

22.2

FLB

35.0

FHLB

-0-

6/30/74

Percent
Amount
of 6/30/74
Eligible for
Total
Purchase 6/30/74 Eligible
Holdings

System
Holdings as
Percent of
Eligible

6/30/74

13.2

0.5

1,711.7

2.6

0.8

70.9

66.5

2.3

6,626.9

10.1

1.0

141.1

245.7

363.1

12.7

10,054.6

15.3

3.6

75.8

155.6

279.5

524.7

18.3

14,750.0

22.5

3.6

FNMA

201.3

784.9

1,010.8

1,451.1

50.8

19,950.0

30.4

7.3

GNMA

18.5

47.7

41.5

58.6

2.1

3,490.0

5.3

1.7

EXIM

8.7

105.6

108.2

116.6

4.1

2,750.0

4.2

4.2

FHA

-0-

36.0

134.5

172.9

6.0

5,108.0

7.8

3.4

P.S.

-0-

14.3

24.7

24.8

0.9

250.0

0.4

9.9

WMTA

-0-

4.0

20.7

63.0

2.2

670.0

1.0

9.4

GSA

-0-

1.0

3.7

0.1

200.0

0.4

1.9

1,937.5

2,858.1

100.0

65,561.2

100.0

4.4

TOTAL

485.0

-01,311.4

June 28,

1974

Authorized for public release by the FOMC Secretariat on 8/21/2020

Table VI

System Purchases of Securities of Each Agency
(in millions of dollars)

1971
(4 months)

1972

1973

1974
(6 months)

COOP

23.8

16.8

-0-

13.2

FICB

121.9

88.2

60.9

56.6

FLB

35.0

129.2

114.6

176.1

FHLB

75.8

118.7

173.3

278.4

FNMA

201.3

651.2

369.7

555.4

GNMA

18.5

41.3

6.9

17.1

EXIM

8.7

96.9

13.1

8.4

FHA

-0-

36.0

98.4

38.4

P.S.

-0-

14.3

10.5

-0-

WMTA

-0-

4.0

16.8

42.3

GSA

-0-

1.0

2.7

865.2

1,188.6

TOTAL

485.0

-01,196.6

June 28, 1974

Authorized for public release by the FOMC Secretariat on 8/21/2020

Table VII

YIELD SPREADS
Agencies less Treasuries
(in basis points)

1
5
10
20

1
5
10
20

year
year
year
year

year
year
year
year

1973

Average Spread
1972
1971

1970

-13
28
46
42

13
23
53
128

33
34
70
158

1973

Maximum Spread
1972
1971

1970

29
43
77
145

67
56
96
173

32
57
76
92

1973
1
5
10
20

year
year
year
year

SOURCE:

13
31
80
151

38
54
118
187

Minimum Spread
1972
1971

1970

1
9
36
107

-014
49
144

Salomon Brothers market reviews.

June

28,

1974


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102