FAQs: Treasury Rollovers

Effective December 28, 2017

How is the Desk implementing the FOMC’s directive for Treasury rollovers?
In its September 20, 2017 statement, the Federal Open Market Committee (FOMC) announced that it will initiate, in October, the balance sheet normalization program described in the June 2017 addendum to the Committee’s Policy Normalization Principles and Plans.  This program will gradually and predictably reduce the Federal Reserve’s securities holdings by decreasing the reinvestment of principal payments from securities held in the System Open Market Account (SOMA). Specifically, the FOMC has directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to roll over at auction the principal payments from the SOMA holdings of Treasury securities maturing during each calendar month that exceed the cap amount for that month. If the amount of maturing securities in a month is lower than the cap in effect that month, then no maturing securities will be rolled over during that month. In October 2017, the monthly cap will be $6 billion, and based on the June 2017 addendum, the cap will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month. For the schedule of monthly caps, see: https://www.newyorkfed.org/markets/opolicy/operating_policy_170920.

How will the Desk determine the amount to roll over at each issuance date?
The Desk will calculate the rollover amount by subtracting the monthly cap from the amount of principal payments scheduled to be received during a calendar month. It will then allocate that rollover amount between the mid-month and end-of-month maturity dates in proportion to the amount of SOMA securities scheduled to mature on those dates.

For example, consider the situation where the SOMA holds $21 billion in Treasury securities that mature over the month. In this example, assume the FOMC has directed the Desk to apply a $6 billion cap, resulting in a monthly rollover amount of $15 billion. To determine the amount of mid-month and end-of-month rollovers, the Desk would allocate the rollover amount across the mid-month and end-of-month maturities in proportion to the amount of SOMA securities scheduled to mature on each maturity date. In this example, assume $7 billion of the maturities occur on the mid-month date and the remaining $14 billion occur on the month-end 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 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. Using the same scenario as the example above, the securities maturing on the mid-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 $25 billion, $15 billion, and $10 billion respectively. The $5 billion would be allocated across these three securities in proportion to their announced offering amounts, as shown below:

Securities maturing on the month-end date would be exchanged for securities being issued on that same day. For the purpose of this example, assume the Treasury is auctioning a 2-year security, a 5-year security, and a 7-year security for $20 billion, $20 billion, and $10 billion, respectively. The $10 billion would be allocated across these three securities in proportion to their announced offering amounts, as shown below:

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, that maturity will be included 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.

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 sizes. With respect to TIPS securities, the maturing principal amount includes the inflation adjustment.

What are the limits on the SOMA holdings of any one Treasury issue?
SOMA holdings are currently limited to not more than 70 percent of the total outstanding amount of any one Treasury security.

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

Will the Desk sell Treasury securities if the monthly cap exceeds the monthly principal payment amount?
No. The cap is the maximum amount that the SOMA holdings of Treasury securities will decline each month. If the total amount of monthly Treasury principal payments was below the monthly cap amount, then the reduction in the SOMA’s Treasury security holdings that month would be equal to the amount maturing, and no rollovers would occur.

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.

When do SOMA holdings of Treasury securities decline as a result of the FOMC’s balance sheet normalization program?
Declines in SOMA Treasury holdings resulting from the FOMC’s balance sheet normalization program will occur on the maturity dates for the monthly Treasury maturities subject to the cap.

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 Treasury securities not rolled over at maturity, movements in inflation compensation, and purchases or sales of Treasury securities associated with small value operational readiness exercises.

For example, for the month of October 2017, SOMA maturities amounted to $8.7 billion, with all maturities occurring on October 31. The monthly cap in October was $6 billion, so the Desk rolled over $2.7 billion into new Treasury securities and allowed $6 billion to mature without reinvestment. The H.4.1 reported holdings of U.S. Treasury securities of $2,465.7 billion as of October 25, 2017 and holdings of $2,459.8 billion as of November 1, 2017. This $5.9 billion change represented the $6 billion decline associated with the application of the monthly cap and a $0.1 billion increase associated with changes 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.

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