Given the Federal Reserve’s experience in the agency MBS market over the past eight years, it is important to consider what role—if any— agency MBS transactions may have in the policy implementation toolkit of the future. 1 SOMApurchased agency debt from 1971 to 1981, so participating in one of the agency markets was not entirely  new in 2008. In addition, in 2011–12 a maturity extension program extended the maturity of Treasury securities in the SOMA portfolio, although it did not expand the size of the SOMA portfolio. 2 The share is calculated as of October 12, 2016, see System Open Market Account Holdings. 3 Since the start of the year, these purchases have averaged approximately $ billion per month. In addition to 7 / 10  BIS central bankers' speeches  conducting these transactions, the Desk reinvests maturing proceeds from Treasury securities, though the Treasury reinvestment transactions take place at auction rather than in the primary market. 4 The accommodative monetary policy stance of the European Central Bank (ECB) rests upon three nonstandard  instruments: a series of targeted long-term refinancing operations, a negative deposit facility rate, and an asset purchase program that includes private and public sector securities. The Bank of England (BoE) currently sets the Bank Rate at 25 basis points and is currently purchasing £ billion in gilts over a 6-month period; the Asset Purchase Facility will have £ billion in gilts when the purchase round ends in February 2017.
Prepayment is especially attractive when interest rates fall and homeowners are able to refinance their loans into new loans at a lower interest rate. Investors demand an extra return to bear the risk of prepayment, which is incorporated into the yield of agency MBS. By purchasing agency MBS, the Federal Reserve can bear a considerable amount of this risk, removing it from the portfolios of private investors and thereby lowering mortgage rates. This outcome, in turn, stimulates additional demand for housing, and promotes increased refinancing activity. In the current environment, the Federal Open Market Committee (FOMC) has directed that principal payments from SOMA’s agency debt and agency MBS portfolio be reinvested into agency MBS. Therefore, SOMA reinvests the monthly paydown of principal on an ongoing basis. As a result, the Federal Reserve maintains a regular presence in the agency MBS market with near daily purchase operations. 5 / 10  BIS central bankers' speeches  Review of the Federal Reserve’s Two Agency MBS Purchase Programs Since 2008, two LSAP programs have included the purchase of agency MBS. The primary goals of the two programs differed, reflecting the distinct market conditions and economic environment that existed at the time each was initiated. In LSAP 1, announced in November 2008, agency MBS purchases were chiefly designed to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. In LSAP 3, launched in September 2012, the agency MBS purchases were primarily focused on providing overall policy accommodation.