How Does the Federal Reserve's Large‐Scale Asset Purchases (LSAPs) Influence Mortgage‐Backed Securities (MBS) Yields and U.S. Mortgage Rates?

36 Pages Posted: 26 Oct 2015

See all articles by Diana Hancock

Diana Hancock

Federal Reserve Board - Division of Research and Statistics

S. Wayne Passmore

Board of Governors of the Federal Reserve - Household and Real Estate Finance Section

Date Written: Winter 2015

Abstract

We conduct an empirical analysis of the Federal Reserve's large‐scale asset purchases (LSAPs) on mortgage‐backed securities (MBS) yields and mortgage rates. We estimate a cointergrated, error‐correction model that links Federal Reserve securities purchases and stocks of Treasury and MBS securities to equilibrium MBS yields and mortgage rates. The Federal Reserve's accumulation of MBS and Treasury securities lowered MBS yields and mortgage rates by more than what would have been suggested by changes in market expectations alone, suggesting that portfolio rebalancing effects of LSAPs are an important consideration for monetary policy transmission. Our estimates also suggest that the Federal Reserve must hold a substantial market share of agency MBS or of Treasury securities to significantly lower MBS yields and in turn significantly lower mortgage rates.

Suggested Citation

Hancock, Diana and Passmore, Stuart Wayne, How Does the Federal Reserve's Large‐Scale Asset Purchases (LSAPs) Influence Mortgage‐Backed Securities (MBS) Yields and U.S. Mortgage Rates? (Winter 2015). Real Estate Economics, Vol. 43, Issue 4, pp. 855-890, 2015. Available at SSRN: https://ssrn.com/abstract=2679172 or http://dx.doi.org/10.1111/1540-6229.12109

Diana Hancock (Contact Author)

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3019 (Phone)
202-452-5295 (Fax)

Stuart Wayne Passmore

Board of Governors of the Federal Reserve - Household and Real Estate Finance Section ( email )

Washington, DC 20551
United States
202-452-6432 (Phone)
202-452-3819 (Fax)

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