NEW YORK, Jan 24 (Reuters) - The U.S. Federal Reserve will eventually replace its mortgage-backed securities with short-dated Treasuries in an effort to reduce their interest rate risks, Bank of America Merrill Lynch analysts said in a report released on Thursday.
The central bank would embark on such a swap when it ends its current reduction of its balance sheet, which Bank of America analysts forecast would happen towards the end of 2019.
“We expect they do this primarily by converting maturing MBS into short-dated USTs or bills,” they wrote in a research note.
The central bank amassed huge amounts of government and mortgage debt, known as quantitative easing, to combat the fallout of the global financial crisis and the ensuing recession. This increased the Fed’s balance sheet to $4.5 trillion in September 2017.
Fed policy-makers decided to scale back its bond holdings, beginning in the fourth quarter of 2017 as the U.S. economy was improving and did not require an extraordinarily high level of monetary stimulus.
Currently, the Fed has about $1.633 trillion in MBS and $2.220 trillion in Treasuries.
At the end of 2019, its MBS and Treasuries holdings are expected to decline to $1.433 trillion and $1.954 trillion, respectively, according to Bank of America analysts. (Reporting by Richard Leong Editing by Chizu Nomiyama)