NEW YORK, Aug 17 (Reuters) - The Federal Reserve bought $2.55 billion of Treasuries on Tuesday in the first operation of a program to take up government debt using cash from maturing mortgage bonds it holds.
The central bank announced the Treasury purchase program last week, saying it was intended to keep its holdings of domestic securities steady. When announcing the program at the end of its August policy meeting, the Fed significantly downgraded its economic outlook.
The Fed on Tuesday bought Treasuries maturing between August 2014 and February 2016. Dealers submitted $20.95 billion of Treasuries for consideration in the purchase. For details see [ID:nTAR001261].
The Fed has said it intends to buy about $18 billion of Treasuries from mid-August through mid-September, which equals the amount of principal payments from the Fed's agency debt and agency mortgage-backed securities holdings through the period.
The central bank also said last week it intends to buy primarily in the two-year to 10-year note area.
"They came in at $2.5 billion, which seems reasonable for the first round -- we would expect that $2.5 billion to $3 billion will be the norm for the target sector that the Fed has outlined," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.
"You will probably see much less buying in (Treasury inflation-protected securities), the long bond and the front end," Lyngen said.
Last year, the Fed embarked on a program to buy about $300 billion of Treasuries in an effort to lower interest rates like those on mortgages to combat the worst U.S. recession in seven decades.
But rates actually rose during the program, with 10-year Treasury yields climbing to about 3.40 percent at the end of October, 2009, from about 2.80 percent in late March 2009. At the time, investors pulled money from lower-risk government debt and bought stocks on rising optimism over a speedy economic recovery.
Treasury debt yields have been falling steadily since early April as worries over contagion from a debt crisis in Europe and fears of a faltering U.S. economic recovery have reignited safe-haven buying of bonds. Ten-year Treasury note yields hit a 17-month low of 2.56 percent on Monday.
Some analysts saw the program of buying Treasuries with maturing mortgage debt continuing until the Fed is confident about the strength of economic recovery.
"It is going to continue until the Fed is ready to remove accommodation, and when they are ready to remove accommodation, (ending the program) will be one of the first steps," Lyngen said. (Reporting by Chris Reese; Editing by Dan Grebler)