Treasury Buybacks, the Fed’s Portfolio, and Changes in Local Supply

We estimate the effects of the 2000-2002 Treasury Buyback program on Treasury returns and the Federal Reserve’s System Open Market Account (SOMA) portfolio. The buybacks had statistically significant, but economically very modest, effects on both bonds and bonds of similar securities: by reducing the supply of securities, prices of both that security and its close (maturity) substitutes increased. Changes in supply contributed about 4 basis points to returns over the course of the program – about 1.5% of the total return. We find that the Fed’s holdings of individual securities were largely unaffected over the course of the buyback program, and that the Fed was less likely to reduce the supply of securities that were directly or indirectly affected by buyback purchases in the weeks following auctions. This is consistent with the Fed attempting to avoid exacerbating supply shortages in Treasury markets