July 7, 2009 / 8:14 PM / in 8 years

UPDATE 1-Fed to begin lending U.S. agency debt Thursday

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NEW YORK, July 7 (Reuters) - 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 System.

The U.S. central bank has been tweaking the programs created to combat the financial crisis and to end the current recession.

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 York.

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 year earlier.

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)

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