By accumulating a portfolio of long-duration assets, the central bank can compress term premia by extracting duration risk from private investors. Via this “duration extraction” effect, the central bank frees up risk bearing capacity in markets, spurs a rebalancing of private portfolios toward the remaining securities, and thus lowers term premia and yields across a range of financial assets.
18 The lesson to be drawn is that we should continue to develop and monitor a variety of metrics of this scarcity phenomenon because they may provide an early warning if LSAP costs begin to rise relative to benefits. For the sake of concreteness, I have couched the discussion in terms of a hypothetical all-Treasury LSAP.