FAQs: Treasury Rollovers

Effective May 4, 2022

The following frequently asked questions (FAQs) provide further information about the Federal Reserve's exchange of maturing Treasury securities for newly issued Treasury securities.

What is a System Open Market Account (SOMA) Treasury rollover?
A SOMA Treasury rollover describes the process by which principal payments from maturing Treasury securities held by the SOMA are reinvested in newly auctioned securities. Specifically, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York places non-competitive bids at Treasury auctions, in an amount equal to all or a portion of the maturing Treasury securities, that will settle on the maturity date of the maturing Treasury securities. On the auction settlement date, the maturing Treasury securities are exchanged for the newly issued Treasury securities.

How is the Desk implementing the FOMC’s directive for Treasury rollovers?
On May 4, 2022, the Federal Open Market Committee (FOMC) decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities (MBS) on June 1, 2022, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet. Specifically, the FOMC directed the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds the cap amount for that month. It also directed the Desk to redeem Treasury coupon securities up to the monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap. If the total amount of maturing securities in a month is lower than the cap in effect that month, then no principal payments will be rolled over during that month.

For the schedule of monthly caps consistent with the FOMC’s May 4 decision, see:
https://www.newyorkfed.org/markets/opolicy/operating_policy_220504.

How will the Desk determine the amount of Treasury coupons to roll over at each issuance date?
Prior to the start of each month, the Desk will determine the amount of Treasury coupons to roll over by subtracting the monthly cap from the total amount of principal payments from Treasury coupon securities maturing during the calendar month. The Desk will roll over the amount of coupon principal payments in excess of the cap. The Desk will allocate the Treasury coupon rollover amount between the mid-month and end-of-month maturity dates in proportion to the amount of SOMA coupon holdings scheduled to mature on those dates. If coupon principal payments for a given month are below the monthly cap, all coupon securities will be redeemed.

Consider an example where the SOMA holds $75 billion in Treasury coupons that mature over the month. In this example, assume the FOMC has directed the Desk to apply a monthly cap of $60 billion, resulting in a monthly Treasury coupon rollover amount of $15 billion. Assume $25 billion of the maturities occur on the mid-month date and the remaining $50 billion occur on the end-of-month date. This would result in the Desk rolling over $5 billion at the mid-month date and $10 billion at the end-of-month date.

How will the Desk determine the amount of Treasury bills to roll over at each issuance date?
If the amount of Treasury coupon principal payments for a given month is greater than the monthly cap, then Treasury bill principal payments will be fully rolled over that month.  However, if the amount of coupon principal payments for a given month is below the monthly cap, then bills will be redeemed up to the remaining amount under the monthly cap.

Prior to the start of each month, the Desk will determine the amount of bills to roll over by subtracting the amount of coupon principal payments from the monthly cap amount. The Desk will then subtract any remaining amount under the monthly cap from the amount of Treasury bills maturing that month. The Desk will roll over the amount of bill principal payments in excess of this remaining amount under the monthly cap. To determine the amount of bill rollovers on a given maturity date, the Desk will allocate the Treasury bill rollover amount across the month’s Tuesday and Thursday bill maturity dates in proportion to the amount of SOMA bill holdings scheduled to mature on those dates. If bill principal payments for a given month are below the remaining amount under the monthly cap, all bills will be redeemed.

Consider an example where the SOMA holds $40 billion in Treasury coupons and $50 billion in Treasury bills that mature over the month. In this example, assume the FOMC has directed the Desk to apply a monthly cap of $60 billion. This would result in all $40 billion in Treasury coupons being redeemed, and no Treasury coupon rollover amount. It would also result in $20 billion in Treasury bills being redeemed, and $30 billion of Treasury bill rollovers. The Desk would allocate the $30 billion rollover amount across bill maturity dates in proportion to the amount of SOMA bill holdings scheduled to mature on those dates.

The stylized table above is not representative of every month as the number of Tuesdays and Thursdays within a month can vary.

How will the Desk allocate rollovers across newly issued securities at Treasury auctions?
Consistent with current practice, rollovers will continue to be accomplished by placing non-competitive bids at Treasury auctions; the Desk’s bids will be allocated across the securities being issued in proportion to their announced offering amounts. Coupon securities maturing on the mid-month date, or end-of-month date, would be exchanged for securities being issued on that same day. For the purpose of this example, assume the Treasury is auctioning a 3-year, a 10-year, and a 30-year security for $40 billion, $40 billion, and $20 billion respectively. Applying a prior example, the calculated mid-month rollover amount of $5 billion would be allocated across these three securities in proportion to their announced offering amounts, as shown below:

Treasury bill rollovers would be allocated in proportion to the amount of SOMA bill holdings scheduled to mature on those dates within a month. For the purpose of this example, assume the Treasury is auctioning a 13-week, 26-week, and 52-week Treasury security on the same day for $50 billion, $25 billion, and $25 billion, respectively, and the Desk is rolling over $6 billion on that date. The rollover amount would be allocated across these three securities in proportion to their announced offering amounts, as shown below:

How will the Desk determine the amount of Treasury bills to roll over when there are five Tuesdays within a calendar month?
In months that contain five Tuesdays, a 4-week bill issued on the first Tuesday would mature on the fifth Tuesday of the same calendar month. Because the total amount of maturing funds scheduled to be received on the fifth Tuesday would not be known prior to the start of the month and the auction of the first 4-week bill, the Desk will not include the maturing funds from the rollover into the first 4-week bill when determining the proportion of bills to redeem on the fifth Tuesday. Instead, the amount of maturing funds from the rollover into the first 4-week bill will be rolled over in full on the fifth Tuesday, in addition to the rollover amount determined by the proportion of holdings scheduled to mature on that date as determined prior to the start of the month. 

How does the Desk manage different issue types for rollovers?
SOMA holdings of Treasury notes, bonds, Treasury Inflation-Protected Securities (TIPS), and Floating Rate Notes (FRNs) that are being rolled over are exchanged at auction across all Treasury notes, bonds, TIPS, and FRNs issued on that day in proportion to their issuance amounts. With respect to TIPS, the maturing principal amount includes the inflation adjustment. SOMA holdings of Treasury bills that are being rolled over are exchanged at auction across all Treasury bills issued on a given day in proportion to their issuance amounts.

How does the Desk manage a month-end maturity that occurs on a weekend or a holiday?
If a month-end maturity occurs on a weekend or holiday, the Desk will include that maturity in the total maturing funds for the month corresponding with the stated maturity date, not for the month in which the funds are actually received. For example, if December 31 occurs on a Sunday, any SOMA maturities that occur on December 31 will be treated as part of the December maturities, even though the cash flow associated with that maturity will occur on the next business day in January.

What are the limits on the SOMA holdings of any one Treasury issue?
The Desk will limit SOMA holdings to a maximum of 70 percent of the total outstanding amount of any individual Treasury security.

Is there a minimum amount of maturing securities required for rollover?
The Desk exchanges all maturing holdings of Treasury securities at auction, subject to the U.S. Treasury’s $100 minimum bid requirement.

How do SOMA rollovers affect the price of the auctioned securities?
SOMA tenders are entered as noncompetitive bids and therefore do not affect the stop-out rate of the auction. Noncompetitive bidders receive the stop-out rate, yield or discount margin determined by the competitive auction process. When the SOMA is awarded securities at auction, the Treasury Department increases the total issue size by the amount of the SOMA’s award.

How are SOMA holdings of Treasury securities reported?
SOMA Treasury holdings are reported on a weekly basis in the H.4.1 statistical release. Over any period, changes in the H.4.1 line item "U.S. Treasury securities" reflect the net effect of rollovers, purchases, and sales of Treasury securities, as well as movements in inflation compensation.

Where can I find more information on rollovers and SOMA’s Treasury holdings?
The latest data on the SOMA’s holdings can be found on the New York Fed’s website. The amount that was awarded to the SOMA at auction is reported in the Auction Results released by the Treasury Department upon the conclusion of each auction.

FAQs: May 6, 2020 »