Yesterday the Federal Reserve stated again that it would maintain its existing policies of reinvesting principal payments from its holdings of agency debt and agency MBS in agency MBSs. 

Royal Bank of Scotland (RBS) analysts said the Fed's reinvestment program has been a main technical factor in the agency MBS market. 
 
In research this afternoon, analysts reviewed the size and composition of the Fed's purchases since last September, and made a projection of the Fed's demand for agency MBS throughout the rest of the year. 

Additionally, they closely looked at the quantitative impact of this program on mortgage interest rates and the mortgage basis.
 
They maintained that since October 2011, the Fed's MBS reinvestment program was a net buyer of $136 billion worth of agency MBS. They also said that roughly 90% of its purchases have been focused on 30-year production coupons, including 3.5s and 4s. 
 
According to RBS, the projected amount of reinvestments for 2012 would depend on expected rates of prepayments and principal payments of agency MBS and debt. Analysts estimated that the Fed will probably buy roughly $310 billion in 2012, with around $250 billion likely to be reinvested for the rest of the year. 
 
The considerable downward spike in mortgage-related yields after the Fed's announcement means that the short-term impact of its reinvestment program was considerable.

But, the effects tend to dissipate over time with the impact of policy actions on mortgage rates and MBS demand made less prominent by other factors including economic developments and mortgage servicer hedging activities that happened after the Federal Open Market Committee meeting, analysts stated.

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