Fed Suggests It Would Accept Treasurys Even if Government Missed a Payment

Federal Reserve officials suggested they would continue to accept Treasurys as collateral and use them in central bank operations even if a debt-ceiling crisis caused the government to miss a payment on its bonds, according to minutes of an Oct. 16 videoconference call released Wednesday, reports Jon Hilsenrath.

Without saying so explicitly, the minutes suggested delinquent Treasury securities would continue to be acceptable collateral at the Fed’s discount window, where banks present a range of securities or loans as collateral for short-term cash.

The minutes suggested the Fed also would treat delinquent Treasury debt as so-called money-good in other operations, including its bond-buying program, its securities lending programs (in which it lends out securities in its portfolio to address market shortages) and in market operations with bond dealers.

“Meeting participants saw no legal or operational need in the event of delayed payments on Treasury securities to make changes to the conduct or procedures employed in currently authorized Desk operations, such as open market operations, large-scale asset purchases, or securities lending, or to the operation of the discount window,” the minutes said.

“They also generally agreed that the Federal Reserve would continue to employ prevailing market values of securities in all its transactions and operations, under the usual terms,” it continued.

Bottom line: More evidence will always do whatever is necessary to prop up Treasury issued securities.