The Federal Reserve, struggling to contain a crisis of confidence in credit markets, will for the first time lend Treasuries in exchange for debt that includes mortgage-backed securities.
The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.
U.S. stocks rallied the most in six weeks on optimism the initiative will help avert a wider credit crunch.Treasuries fell, while the premiums investors demand for debt backed by home loans guaranteed by Fannie Mae remained near a 22-year high.
``This is the most significant step the Fed has taken so far,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``This relieves some of the pressure'' in the credit markets, he said.
Today's steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. Officials said the program is aimed at countering a decline in liquidity in financial markets around the world, and comes after signs of increasing stress in U.S. mortgage securities.
New Tool
The Fed said it will lend Treasuries for 28-day periods in return for debt including AAA-rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks. The loans will be made under a new program, the Term Securities Lending Facility, to so-called primary dealers, the 20 banks and securities firms that trade directly with the central bank.
Officials ``will consult with primary dealers on technical design features'' on the new resource before the first weekly auction is held on March 27, the statement said.
The Fed holds about $713 billion of Treasuries on its balance sheet.
Officials anticipate that the primary dealers, which include Goldman Sachs Group. Inc., Bear Stearns and Merrill Lynch & Co., will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets, they told reporters.
Fed's Arsenal
The TSLF becomes the second new tool introduced by the Fed in three months. In December, the Fed set up the so-called Term Auction Facility to loan funds to banks in exchange for a wide variety of collateral, including mortgage debt.
Last week, the Fed increased the size of its planned TAF auctions, to $100 billion this month from a previously announced $60 billion. The central bank also said March 7 that it would make $100 billion available through repurchase agreements, where the Fed loans cash in return for assets including mortgage debt.
``They're trying to put out fires to the best extent they can,'' said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, who is a former New York Fed researcher.
Today's announcement falls short of calls by some analysts and investors for the Fed to make outright purchases of mortgage securities.
Fed officials said they want to increase liquidity and the regular functioning of markets, rather than determine appropriate prices for securities. Buying the home loan debt directly would affect prices, they added.
Tightening Credit
The measures are the latest in Chairman Ben S. Bernanke's effort to alleviate increasing strains in financial markets that are curtailing credit to homeowners and companies, even after the Fed lowered its main interest rate by 2.25 percentage points.
The Federal Open Market Committee authorized increasing currency swap lines with the European Central Bank and Swiss National Bank to $30 billion and $6 billion, respectively, increasing the ECB's line by $10 billion and the Swiss line by $2 billion. The Fed extended the swaps through Sept. 30.
The ECB announced it will lend banks in Europe up to $15 billion for 28 days and the SNB announced a similar auction of up to $6 billion. The Bank of England will offer $20 billion of three-month loans on March 18 and hold another auction on April 15. The Bank of Canada announced plans to purchase $4 billion of securities for 28 days.
Treasuries slid after the announcement, with yields on 10- year notes rising to 3.56 percent as of 12:48 p.m. in New York, from 3.46 percent late yesterday.
Traders removed bets on the Fed to lower its benchmark rate by a full percentage point, to 2 percent, by the end of the next meeting on March 18, futures showed. The contracts indicate a 76 percent chance of a 0.75 percentage-point reduction.
The Fed said in a statement in Washington it plans to make up to $200 billion available through weekly auctions. Officials told reporters on condition of anonymity that the program may be increased as needed. The Fed coordinated the effort with central banks in Europe and Canada, which plan to inject up to $45 billion into their banking systems.
U.S. stocks rallied the most in six weeks on optimism the initiative will help avert a wider credit crunch.Treasuries fell, while the premiums investors demand for debt backed by home loans guaranteed by Fannie Mae remained near a 22-year high.
``This is the most significant step the Fed has taken so far,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``This relieves some of the pressure'' in the credit markets, he said.
Today's steps indicate the Fed is increasingly concerned about the investor exodus from mortgage debt, which threatens to deepen the housing contraction and the economic slowdown. Officials said the program is aimed at countering a decline in liquidity in financial markets around the world, and comes after signs of increasing stress in U.S. mortgage securities.
New Tool
The Fed said it will lend Treasuries for 28-day periods in return for debt including AAA-rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks. The loans will be made under a new program, the Term Securities Lending Facility, to so-called primary dealers, the 20 banks and securities firms that trade directly with the central bank.
Officials ``will consult with primary dealers on technical design features'' on the new resource before the first weekly auction is held on March 27, the statement said.
The Fed holds about $713 billion of Treasuries on its balance sheet.
Officials anticipate that the primary dealers, which include Goldman Sachs Group. Inc., Bear Stearns and Merrill Lynch & Co., will lend the Treasuries on to other firms in return for cash. That will help the dealers finance their balance sheets, they told reporters.
Fed's Arsenal
The TSLF becomes the second new tool introduced by the Fed in three months. In December, the Fed set up the so-called Term Auction Facility to loan funds to banks in exchange for a wide variety of collateral, including mortgage debt.
Last week, the Fed increased the size of its planned TAF auctions, to $100 billion this month from a previously announced $60 billion. The central bank also said March 7 that it would make $100 billion available through repurchase agreements, where the Fed loans cash in return for assets including mortgage debt.
``They're trying to put out fires to the best extent they can,'' said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York, who is a former New York Fed researcher.
Today's announcement falls short of calls by some analysts and investors for the Fed to make outright purchases of mortgage securities.
Fed officials said they want to increase liquidity and the regular functioning of markets, rather than determine appropriate prices for securities. Buying the home loan debt directly would affect prices, they added.
Tightening Credit
The measures are the latest in Chairman Ben S. Bernanke's effort to alleviate increasing strains in financial markets that are curtailing credit to homeowners and companies, even after the Fed lowered its main interest rate by 2.25 percentage points.
The Federal Open Market Committee authorized increasing currency swap lines with the European Central Bank and Swiss National Bank to $30 billion and $6 billion, respectively, increasing the ECB's line by $10 billion and the Swiss line by $2 billion. The Fed extended the swaps through Sept. 30.
The ECB announced it will lend banks in Europe up to $15 billion for 28 days and the SNB announced a similar auction of up to $6 billion. The Bank of England will offer $20 billion of three-month loans on March 18 and hold another auction on April 15. The Bank of Canada announced plans to purchase $4 billion of securities for 28 days.
Treasuries slid after the announcement, with yields on 10- year notes rising to 3.56 percent as of 12:48 p.m. in New York, from 3.46 percent late yesterday.
Traders removed bets on the Fed to lower its benchmark rate by a full percentage point, to 2 percent, by the end of the next meeting on March 18, futures showed. The contracts indicate a 76 percent chance of a 0.75 percentage-point reduction.
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