The Federal Reserve disclosed plans to again pull back its investments in agency mortgage-backed securities — sending bond yields higher. But the level of tapering is smaller than the decline in agency MBS issuance.
The Federal Open Market Committee issued a statement Wednesday indicating that it would reduce the amount that it adds to its agency MBS holdings to $25 billion per month.
The announcement followed the FOMC’s statement in January that it would scale back the growth in its agency MBS to $30 billion a month from $35 billion.
Investments in Treasury securities are being cut to $30 billion a month from $35 billion a month, according to the today’s announcement.
The latest FOMC statement indicated that while economic activity slowed this winter partly due to adverse weather conditions, the labor market showed signs of further improvement. But the unemployment rate is still elevated, and the housing recovery is dragging.
“The committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions,” the FOMC statement said. “In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the committee decided to make a further measured reduction in the pace of its asset purchases.”
Following the FOMC’s statement, the price of the 10-year Treasury note was down 24/32. Bond yields move higher when bond prices retreat.
A year ago, the Fed was buying agency MBS at a pace of $40 billion per month.
But while its purchases have been reduced by 38 percent as of its latest announcement, agency MBS issuance has declined 42 percent — to $89.303 billion in January 2014 from $154.473 billion in January 2013.
