(Recasts, adds background)
NEW YORK, July 7 The Federal Reserve will start
on Thursday to lend the debt issued by government-sponsored
mortgage agencies in a move to expand the central bank's
program to help bond dealers raise short-term cash, the New
York Fed announced on Tuesday.
The Fed's daily lending program, in which primary dealers
may use borrowed Treasuries to raise short-term cash will be
expanded to include debt issued by Fannie Mae FNM.N FNM.P,
Freddie Mac FRE.N FRE.P and the Federal Home Loan Bank
The U.S. central bank has been tweaking the programs
created to combat the financial crisis and to end the current
The latest move offers another option for dealers to raise
short-term cash. It also signals that investors might be
willing to accept slightly riskier collateral in exchange for
cash, given the improvement in credit conditions since the peak
of the credit crisis.
One analyst said this suggests the Fed is in no rush to
unwind its quantitive easing programs to stimulate lending and
overall growth. There have been concerns the Fed's massive
purchase of securities and near-zero percent rate policy will
cause a resurgence in inflation once the economy recovers.
"This is another blow for the early
bum-rush-the-exit-strategy advocates," said George Goncalves,
head of fixed income rates strategy at Cantor Fitzgerald in New
The Fed's securities portfolio, the System Open Market
Account (SOMA), has swollen as the U.S. central bank has been
buying Treasuries and mortgage-related securities in a bid to
hold down mortgage and other long-term borrowing costs.
The Fed's combined holding of Treasuries, debt issued by
Fannie Mae, Freddie Mac and the Federal Home Loan Bank system
and mortgage-backed securities guaranteed by these agencies was
$1.223 trillion on July 1, up more than $700 billion from a
The New York Fed conducts an auction at noon each business
day where primary dealers -- firms that deal directly with the
Fed -- can borrow U.S. Treasuries overnight from the U.S.
central bank's holdings.
These borrowed Treasuries are considered the safest and
most liquid securities.
Beginning Thursday, dealers can also borrow agency
securities as well as Treasuries from the Fed for a small fee,
according to the New York Fed.
(Reporting by Richard Leong; Editing by Leslie Adler)