Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 21, 1972 : Memo: Operations in Government Agency Securities

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BOARD

OF GOVERNORS
OF THE

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551

March 9, 1972

CONFIDENTIAL (FR)

TO:

Federal Open Market Committee

FROM:

Mr. Broida

Enclosed is a memorandum from the System Account Manager,

dated today and entitled "Operations in Government Agency Securities."

The memorandum reviews the Desk's experience since it

began outright operations in agency securities and presents a
recommendation for a revision of the guidelines governing such
operations.
It is contemplated that this memorandum will be discussed

at the meeting of the Committee on March 21, 1972.

Arthur L. Broida,
Deputy Secretary,

Federal Open Market Committee.
Enclosure

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CONFIDENTIAL (FR)
TO:

March 9, 1972

Federal Open Market Committee

FROM:

Alan

R.

Holmes

SUBJECT:

This memorandum reviews,
mittee,

the

in Federal

experience of

the

Agency securities by
Federal Open Market

involvement and

given,
on

issues

at its

its

using

Com-

began operations

decided to sell

delivery".

of

Since the

of

the

to

temporarily under

authorization was

of $806.6

million Agency
of

under the market

issues

soliciting offer-

February 17,

the

Desk was

need for a very large absorption

to bid

of

and the

for Treasury bills

faced

reserves

in

conjunction with

22.

In a go-around,

for cash

due within six months

Desk sold $53.9

million.

the Agency sales was

very modest.

the opportunity to

buy Agencies

conditions

1972.

As part of the program, it was

on Tuesday, February

Agency issues

parently welcomed

System's

the Agency market.

for "a

and
for

regular

The dealers responded with bids for about $700

Agencies

attributable

1971

"go-around" method

on Thursday,

of Treasury bills

amount

on August 24,

the extent

some short-term Agency issues

dealers were asked

the

acquired only

dealers.

the

States Government

The last purchases were made on February 14,

the prospective

the

the

authorized by

operations on

over the period through mid-March.

of

limit

the Desk has purchased a total

Beginning

modest

meeting

to

could be

agreements with

ings in each case.

sales

it

of United

System Account were

impact of

seven occasions,

with

the

and sales

Committee

the

then, Agency

repurchase

information of

Trading Desk since

certain guidelines designed

Until

the

Agency securities.
Outright purchases

under

for

Operations in Government
Agency Securities.

then prevailing.

million

The market
Most

impact

dealers

from the

ap-

System

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- 2 -

After allowing

$14.5

the sales

and

for the

redemption of

million short-term issues that matured during the period,

System holdings

million.
the

for

of

Agency

These holdings

largest holding

of

issues on

February 23,

1972 were

$738.1

included securities of eight Agencies --

any one Agency's

securities was

$465

million

of FNMA issues (see attached table).
Purchases of Agency issues were begun on September 23,
1971 after the guidelines had been made public and explained in
detail to the dealers.

The first two go-arounds were limited to

only part of the maturity range, and the Desk avoided buying a
large number of individual issues,

in order to enable the Reserve

Bank accountants to gain some experience in handling the issues
before embarking on full-scale operations.
go-arounds, the request
outstanding issues

for offerings was

In the succeeding five
for most,

or all, eligible

(in some operations very short maturities were

excluded) and there was no longer any attempt to limit the number
of issues acquired and held in the System Account.
The five months'

experience indicates that up to the present

System operations have been taken well in stride by the Agency
market.

The net absorption of over $700 million of Agency securities

by the System was only a small offset to the net
$4.3 billion in total Agency issues outstanding.
degree,

System purchases

increase of almost
To some modest

thus contributed to the market's absorption

of this huge amount of new financing by the Agencies.

Prices of

Agency issues temporarily responded moderately to some of the
System's go-arounds but there did not seem to be any great change
in the status of Agencies as an investment merely because they had
become instruments

suitable for System open market operations.

spread between yields of Agencies and comparable maturities

of

The

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3 -

Government securities on February 23,
cantly from September 23,

1972 did not change signifi-

1971 except for a narrowing in the short-

term area, apparently a result of the acute scarcity of all shortterm paper in the market.

On the other hand, given the large

volume of Agency financing, it is possible that yield spreads over
Treasury issues might have widened in the absence of System purchases.
There was no

indication that

System operations had any undue influence

on the pricing of new Agency issues offered during the period.
haps because of fortuitous timing, the Desk did not

Per-

feel inhibited

at any time when it desired to buy Agencies because of new financing
by

some individual Agency, but this absence of restraint cannot neces-

sarily be counted on at all times in the future.
In the first six go-arounds

insured notes of the Farmers

Home Administration were not considered by the Desk to be eligible
for purchase because of inadequate evidence of an active secondary
market in those issues

(a requirement of the guidelines).

Based on

evidence submitted by several of the dealers, and transfer records
kept at the

Federal Reserve Bank of New York, it was concluded re-

cently that a reasonably active secondary market had developed in
these issues.

Therefore, in the last purchase go-around, the FHA

notes were included in the request for offerings and approximately
$2.5 million were purchased.
Throughout the period, the basic accounting records relating

to par value, interest accruals,

discount,

amortization of premium or

and earnings have been kept by hand while awaiting the

development of a computer program to handle the work.

However,

the

existing computer program has been able to participate aggregates
of

these items among the Reserve Banks.

It

is expected that a new

computer program will be completed shortly, thereby relieving the

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burden of

current
the

4 -

accounting for

manually

Committee's attention.

issues

involved, and

issues have

the

tended

and

to

the

on

large number of

Meanwhile,

to make a number

a price scale,

go-arounds in

the

Agency market

the

have

individual

longer to complete than is

take

--

should be brought to

for some dealers

same issue

securities.

for Government

of

Because

the tendency

of

small offerings

Agency

-- while not serious

in handling the Agency operations

occurred

of

of

portion

System Account.
Some other practical problems

the

the Agency

acceptance or

the case

is practically
of

rejection

immobilized while the dealers

await

their offerings by the Desk.

This has been dealt with by placing

some limits on the time allowed for the dealers to present their
offerings

after the Desk initiates

Nevertheless,

a go-around.

the

still take longer than those in Government coupon issues.

operations

Delivery failures are more frequent because of the extremely limited
Consequently,

opportunities for the dealers to borrow Agency issues.
temporary substitutions
System are more

of

numerous

other

securities on

deliveries to

securities, which are

than in Government

much larger issues and, therefore, more easily borrowed.
course,
the

complicates

bank involved.

deliveries and
The delivery

adds

to the work

failures

the

This, of

in allareas

of

sometimes occur because,

unlike Government securities, most Agency issues cannot be transferred over
securities

the System wire service so
physically held

that

dealers

can only deliver

in New York.

Another potential problem arises out of the Committee's
guideline
any one

governing Agency purchases

issue

The limit has

to

10 percent

of

that

the amount

already been reached

for

two

limits
of

System holdings

that

issues,

lion FICB and the other a $250 million FNMA issue.

of

issue outstanding.
one

a $403 mil-

This has, in

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effect,
future
more

removed

and more
as

launched
in this

the

its

as

the

ommends

that

view of

25 percent
approach

of

total

total
nearly

amount
20

higher

the

of

the recent

10 percent

revise

the

the understanding
than was

issues

up

case

to $1.5
of

the

issues

the

and of
and more

Management rec-

that

the Desk would
case with

the

connection
30

some

issues

billion System holdings

total outstanding,

appropriate

System holdings to

constitute about

of Treasury coupon

it

operate

in more

figure

on

to

experience

the Account

limit

While

the System

demonstrated ability

limit more slowly

larger Treasury coupon

Attachment

the

for

undertaken,

limitation.

outstanding, with holdings of

percent

or higher.)

this

(It may be noted in this

In the
of

eligible

seemed reasonable when

considerations,

Treasury bill

amount

47 percent.

of

issue, with

level.

10 percent
holdings

these

Committee

of any

this

those

operations are

affected by

in light

attainment

the

of

a moderate, nondominating scale makes

limitation

prospective
In

10 percent

on

list

additional

Agency operations,

market

review

As

from the

issues will be

low

cases.

the

issues

System purchase.

a limit

to

these

that

System

percent
issues

the

of

reaching

outstanding in
range up

while for

some

System's proportion is 50

to
of

the

percent

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PURCHASES

AND SALES

OF AGENCY

ISSUES

SEPTEMBER 23, 1971 - FEBRUARY 23, 1972
(in thousands of dollars)

COOP

FHLB

FICB

1,000

12,600

17,000

FLB

FNMA

GNMA

EX-IM
BANK

FHA

TOTAL

Purchases
1971 - Sept. 23

18,000

61,000

27,030

34,880

30

-

7,850

5

-

23,450

14,575

5,500

35,205

4,200

82,930

26

5,625

19,300

51,335

3,815

75,765

5,000

160,840

Dec. 16

17,200

12,550

39,020

13,275

45,315

9,300

8,700

-

145,360

10,900

143,055

4,000

5,600

-

172,755

Nov.

1972 -

12,400

Jan.

5

Feb.

10

-

9,200

550

11,530

2,100

9,270

120,855

24,375

96,480

124,030

55,160

465,225

10,000

38,935

5,000

Redemptions

8,025

6,475

HoldingsFeb. 23, 1972

6,350

Total Purchases

22,500

2,000

2,502

148,807

16,300

2,502

806,572

Sales
1972

-

Feb.

22

96,480

78,620

53,935
14,500

50,160

465,225

22,500

16,300

2,502

738,137