FED HOARDS A TRILLION IN TREASURYS / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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JANUARY 30, 2011, 2:18 P.M. ET.

Fed Hoards a Trillion in Treasurys
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By DAVID REILLY

The Federal Reserve has passed yet another milestone on its journey into uncharted territory: Its average holdings of longer-term Treasurys have passed the $1 trillion mark.
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Prior to the financial crisis, the Fed tended to hold up to $700 billion in Treasurys, two-thirds of which typically had a longer term than a year. But thanks largely to its $600 billion bond-buying program, left unchanged at the Fed's meeting last week, Treasury holdings have ballooned. Earlier in January total Treasury holdings, including short-term bills, passed the $1 trillion mark. Last week the Fed's holdings of longer-term U.S. debt, notes and bonds—those with a term of more than a year—averaged $1.022 trillion.
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And even if the Fed's bond-buying program ends as planned in June, the Fed may have to keep purchasing significant amounts of Treasurys for some time. If it did nothing, about $200 billion to $300 billion in Treasurys and mortgage-backed securities would mature annually starting in 2012, estimates Lou Crandall, chief economist at Wrightson ICAP.


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That would amount to a de-facto tightening of monetary policy, which could pose challenges should the recovery again sputter.
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Investors will also have to consider other possibilities. Should inflation become a threat, the Fed may be forced to sell some of its holdings. That was one option noted in a speech this month by Fed Vice Chair Janet Yellen.
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But any indication that the Fed could begin selling would likely roil bond markets as investors try to beat it to the exit. The bigger its portfolio of longer-term Treasury holdings, the greater that worry becomes.
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