–Purchased A Total Of $773 Billion In Tsys Over 2011
NEW YORK (MNI) – The New York Federal Reserve Bank Wedneday
released a report summarizing the evolution of the domestic
assets held in the SOMA portfolio over 2011 and described the open
market operations that were implemented by the Desk to manage the
portfolio. The following are excerpts from the report:
The balance sheet was assumed to evolve according to the general
principles that the FOMC described in the minutes from its June 2011
meeting. For this particular example, balance sheet normalization steps
were assumed to begin with redemptions of all maturing SOMA holdings two
quarters before the first increase in the federal funds target rate. MBS
sales were assumed to begin two quarters after the increase in the
federal funds target rate and to proceed at a steady pace over five
years.26
Based on these assumptions, SOMA holdings would remain stable at
about $2.6 trillion until mid-2013. SOMA holdings would then fall
steadily over about four years through a combination of redemptions and
asset sales, bringing the balance sheet to a normalized size, consistent
with a pre-crisis level of reserve balances close to $25 billion, by
early 2017. At that point, purchases of Treasury securities would
resume, offsetting continued MBS sales and supporting normal balance
sheet growth. By mid-2019, the portfolio would return to all Treasury
securities.
SOMA net income under these assumptions is projected to remain near
its recent levels in 2012 and 2013 and then decline for several years to
a trough in 2016, before rising in 2017 and later years. The decline in
income from 2013 to 2016 results primarily from the assumed rise in
interest rates and the decline in SOMA holdings. The rise in interest
rates would reduce SOMA net income by increasing interest payments on
reserve balances, although this effect declines over time since reserves
shrink as the size of the SOMA falls. In addition, coupon income
decreases as the size of the SOMA portfolio returns to lower levels.
Moreover, the assumed sales of securities occur in a higher interest
rate environment and generate realized losses, further reducing income.
SOMA holdings of domestic securities grew from $2.2 trillion at the
beginning of the year to $2.6 trillion at year-end, and the share of
Treasury securities in the portfolio rose to 64 percent at year-end
compared to 47 percent at the start of the year. These changes were
largely driven by the purchases under the LSAP program that were
completed in June. Afterwards, Treasury holdings as a share of the total
portfolio continued to increase modestly for a time because of the
Committees decision in 2010 to continue to reinvest principal payments
received from agency debt and MBS into Treasury securities. The
portfolio composition largely stabilized following the FOMC’s decision
at its September meeting to redirect principal payments on agency debt
and MBS into MBS (Figure 1).
…
A. Treasury Securities Maturity Structure and Composition
In total, the combination of LSAP and reinvestment purchases drove
the level of Treasury securities holdings from $1.0 trillion at the end
of 2010 to $1.7 trillion by the end of September 2011, where they
remained through the rest of the year. In addition, the maturity
characteristics of the portfolio have evolved. Prior to the financial
crisis, SOMA holdings of Treasury securities were skewed towards the
shorter end of the maturity spectrum. The series of balance sheet
actions taken since 2007 have shifted the Treasury securities held in
the SOMA portfolio towards longer-term securities. This pattern was
reinforced by the purchases and sales associated with the maturity
extension program in the last quarter of 2011. As a result, security
holdings with maturities beyond three years were a higher share of the
total portfolio at the end of 2011 than in 2010.
At the end of 2011, the SOMA held 18 percent of all marketable
Treasury securities. Except for the shortest dated securities, market
shares by maturity sector have risen since the onset of the financial
crisis. In 2011, the SOMA market shares of Treasury securities with less
than three years to maturity and of TIPS were little changed at just
less than ten percent. The market share of longer-term Treasury
securities, however, rose significantly. In maturity sectors between 3
and 30 years, the SOMA portfolio holdings averaged between 25 and 35
percent of outstanding Treasury securities at the end of the year.
Purchases and Sales
The Desk purchased a total of $773 billion in Treasury securities
in the secondary market over the course of 2011. Most purchases ($480
billion) were conducted to complete the $600 billion LSAP program
carried over from late 2010. Through September, Treasury securities were
also purchased to replace maturing agency debt ($40 billion) and to
replace principal payments received from MBS holdings ($120 billion).
The program to extend the average maturity of the Treasury portfolio led
to another $133 billion in purchases of Treasury securities in the 6- to
30-year maturity sector, and to a similar amount in sales of securities
with remaining maturities between three months and three years during
the fourth quarter of 2011.
…
B. Agency Mortgage-Backed Securities Holdings and Purchases
The MBS holdings in the SOMA declined from a balance of $992
billion at the end of 2010 to $871 billion at the end of September 2011,
reflecting the effects of principal payments. Principal payments led to
especially large declines in holdings of MBS with 4.5 percent and 5
percent coupons, purchased in 2009 and 2010.
From October through the end of 2011, the Desk reinvested $77
billion of principal payments on agency debt and MBS into MBS, leaving
total MBS holdings at $874 billion at year-end. Reinvestment purchases
in the final quarter of the year were concentrated in recently
originated 30-year fixed-rate MBS with coupons of 3.5 percent and 4.0
percent.
From October through the end of 2011, the Desk reinvested $77
billion of principal payments on agency debt and MBS into MBS, leaving
total MBS holdings at $874 billion at year-end. Reinvestment purchases
in the final quarter of the year were concentrated in recently
originated 30-year fixed-rate MBS with coupons of 3.5 percent and 4.0
percent.
In total, principal payments of MBS in the SOMA portfolio were $195
billion in 2011. The pace of monthly prepayments fell in the first half
of the year, reaching a low of $9 billion in June following an increase
in mortgage rates from late 2010 into the spring of 2011. Prepayments
accelerated during the second half of the year as the primary mortgage
rate declined to record lows by year-end.
** MNI New York Newsroom: 212-669-6430 **
[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$FI$]
