Low rates, liquidity and leverage are the holy trinity of new finance. To properly understand that reality, it is critical to acknowledge the role of the Federal Reserve’s System Open Market Account.
The function of the SOMA is to help the Fed better achieve its monetary policy objectives, by adding to or draining its reserves. The account makes up the vast majority of the Fed’s overall holdings on its balance sheet.
Greater reserves in the system generally support easier funding conditions and ensure the smooth functioning of Treasury and money markets.
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The System Open Market Account is one vehicle that the Fed uses to respond to financial stress and other shocks to maintain orderly financial and market conditions.
Changing the size or composition of the SOMA portfolio affects liquidity and funding conditions. The Fed has approximately $788 billion in Treasury securities maturing this year and $8.64 billion in non-Treasury assets maturing.
For the System Open Market Account overall, the weighted average years to maturity is 14.56 years—which is heavily weighted to long-term securities.
It’s a legacy of the Fed’s quantitative easing after the financial crisis, when the central bank aggressively bought longer-duration Treasuries and mortgage-backed securities to pressure long-term yields lower.
Now, with a Fed chair nominee, Kevin Warsh, who has talked about reducing the Fed’s balance sheet, such a long duration in the SOMA’s weighted average years will only add to the challenge of unwinding these positions without adding undue upward pressure on interest rates.
