US Fed kicks off Treasury purchases by buying $2.55 bln

 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)