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Interpreting Fed MBS Holdings as a Signal of Tapering

Article Quant Q&A · Author: mon
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Summary

The document distinguishes a decline in Federal Reserve mortgage-backed security holdings from the broader meaning of tapering. It explains that tapering generally refers to slowing the pace of asset purchases. A reduction in the Fed’s monthly MBS buying would therefore count as tapering even while the portfolio continued to grow, and changing the policy of reinvesting principal repayments would also reduce support.

The answer reasons that falling MBS holdings would likely imply both that new purchases had stopped and that repayments were no longer being reinvested. That would indicate a more advanced withdrawal of support than an initial slowdown in purchases. The cited context includes the Fed’s stated purchase and reinvestment policies, along with remarks about potentially reducing MBS buying. These figures and statements belong to the historical context discussed in the document, and the answer offers a conceptual interpretation rather than a forecast or a rule for trading from holdings data alone.

Key ideas

  • Tapering usually means slowing the pace of new bond purchases.
  • A reduction in MBS purchase volume can qualify as tapering even before holdings decline.
  • Ending reinvestment of principal repayments also reduces ongoing support for MBS.
  • Falling MBS holdings would suggest purchases and reinvestments had both stopped.

Tags

Fixed incomeUS markets
Full text
# Can MBS (Mortgage Backed Security) holing be the indicator of coming FRB tapering?


# Can MBS (Mortgage Backed Security) holing be the indicator of coming FRB tapering?












## Question

If MBS portion of the FRB agency holdings starts reducing, can it be said that FRB has started tapering or is it too naive to say so?

## Background

It seems MBS is nearly 30% of the entire agency holdings and FRB has been suggesting to cut the MBS holding when time comes.

NY FRB System Open Market Account Holdings of Domestic Securities

> On June 29, Federal Reserve Governor Christopher Waller said it might be time to start cutting back on the Fed’s support for housing. “I think it’s an easy sell to the public,” he told Bloomberg Television. “The housing market is on fire. We should think carefully about doing MBS purchases, and if we were to taper those first that wouldn’t necessarily be a big issue.”

> OMC press conference in April, where Powell responds to a question from Greg Robb of MarketWatch: CHAIR POWELL: Yes. I mean, we’re—we started buying MBS because the mortgage-backed security market was really experiencing severe dysfunction, and we’ve sort of articulated what our exit path is from that. It’s not meant to provide direct assistance to the housing market. That was never the intent. It was really just to keep that as—it’s a very close relation to the Treasury market and a very important market on its own. And so that’s why we bought as we did during the Global Financial Crisis. We bought MBS, too. Again, not an intention to send help to the housing market which was really not a problem this time at all. So—and, it’s a situation where we will taper asset purchases when the time comes to do that, and those purchases will come to zero over time. And that time is not yet.

## Answer by Sharad (score 1, accepted)

https://quant.stackexchange.com/a/66343

Fed tapering is usually interpreted to mean a slowdown in the Fed's rate of bond purchases (Definition of Fed Tapering). So, decreasing the current purchase volume of \$40 billion Agency MBS per month (as of August 2021) to $35 billion would be interpreted as a taper. Also noteworthy here is that the Fed is currently committed to reinvesting all principal payments of Agency MBS back in Agency MBS (SOMA Operations). A change in this policy would also be interpreted as a tapering. In a real life tapering scenario most market participants expect the Fed to first target gradually decreasing its monthly MBS purchases and to then look at ceasing all reinvestments.

To answer your question then, for SOMA MBS holdings to decrease we would probably be in a world where (a) the Fed has stopped purchasing Agency MBS and (b) Has stopped reinvesting the principal payments on its MBS portfolio. In short, a world in which a very active form of tapering was taking place.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.