Because of the perceived guarantee, investors did not fully internalize the consequence of defaults, and so risk was mispriced in the agency MBS market. This mispricing can be notable, and is attributable not only to the improved liquidity, but also to implicit government guarantees.
For instance, at the ECB we are convinced that a thorough analysis of monetary developments – our “monetary pillar” – is important for the conduct of monetary policy and for the anchoring of inflation expectations.