NEW YORK — The Federal Open Market Committee in September 2011 deployed two complementary tools to flatten the yield curve and support mortgage markets: selling short-term Treasuries to fund purchases of longer-dated Treasuries (Operation Twist), and redirecting all principal payments and prepayments from agency securities into agency MBS rather than Treasuries.
The MBS reinvestment shift was the more direct market impact. By committing to purchase $200 billion to $300 billion in agency MBS through 2012, the Fed signaled sustained demand for mortgage securities when private demand had collapsed. The purchases were limited to securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae, with concentration in newly issued MBS.
The Fed's agency portfolio had fallen to just under $1 trillion by September 2011, down from a peak near $1.3 trillion after large-scale asset purchases concluded in March 2010. The MBS reinvestment program kept that portfolio near the $1 trillion floor.
Initial purchases totaled roughly $10 billion in the first weeks after the announcement, with an additional $22 billion anticipated by mid-November 2011.
The mortgage market response was immediate. The 30-year current coupon yields for both Ginnie Mae and Fannie Mae fell approximately 50 basis points following the FOMC's announcement. On Sept. 21, 2011, indexed prices for both issuers jumped at least 5 index points, with Fannie Mae posting a 12-point gain. The price rally reflected the compression in MBS yields as the Fed's re-entry into the market eliminated a major source of supply pressure.
