On December 18, 2013, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase additional agency mortgage-backed securities (MBS) at a pace of about $35 billion per month and longer-term Treasury securities at a pace of about $40 billion per month, beginning in January 2014.  The existing December schedules for agency MBS purchases at a pace of $40 billion per month and Treasury securities purchases at a pace of $45 billion per month remain in effect until that time.  The FOMC also directed the Desk to maintain its existing policies of reinvesting principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS and of rolling over maturing Treasury securities at auction.  The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

Purchases of agency MBS will continue to be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market, and purchases of longer-term Treasury securities will continue to be distributed using the existing set of sectors and approximate weights.  These purchase distributions could change if market conditions warrant.

The amount of agency MBS to be purchased each month and the tentative schedule of Treasury purchase operations for the following calendar month will continue to be announced on or around the last business day of each month.  Additionally, the planned amount of purchases associated with reinvestments of principal payments on holdings of agency securities that are anticipated to take place over each monthly period will be announced on or around the eighth business day of the month.

Consistent with current practices, the purchases of agency MBS and Treasury securities will be conducted with the Federal Reserve’s eligible counterparties through a competitive bidding process and results will be published on the Federal Reserve Bank of New York’s website.  The Desk will continue to publish transaction prices for individual operations at the end of each monthly period. All other purchase details remain the same at this time.

Additional information on the purchases of agency MBS and longer-term Treasury securities can be found in a set of Frequently Asked Questions for each asset class in the following locations:

FAQs: Agency MBS Purchases »

FAQs: Purchases of Longer-term Treasury Securities »

Momentum as an Investment Style

Over the years there has been a significant amount of academic research conducted on the factors driving stock price movements. Researchers have focused on identifying reasons why stocks with certain characteristics tend to outperform persistently.  For example, value-oriented stocks (e.g., those having characteristics such  as low P/E ratios, high book value-to-market value multiples, etc.) have generated strong consistent outperformance of growth-oriented stocks over time. Eugene Fama and Ken French were among the first to highlight the value factor in 1992 in a seminal paper. Fama and French and others have also highlighted  how small caps have outperformed large caps. Besides the value and size factors, several other factors, or styles, have generated statistically significant premiums over long periods of time, including liquidity (e.g., the tendency for less liquid securities to perform better than those that are more liquid), defensive (e.g., stocks that are high quality outperform those of lower quality) and asset growth (e.g., stocks of companies with robust growth in assets underperform those having lower growth).

Momentum has been another style that has performed very well, but hasn’t received the widespread publicity of value and size. The intuition behind momentum as a strategy is that assets that have performed well recently tend to continue to perform well, and conversely, those that have underperformed tend to continue to underperform. In an important 1993 paper, Jegadeesh and Titman first called attention to the momentum factor.  In 1997, Carhart added momentum as a factor to the Fama-French three-factor (i.e., market, value and size) model for understanding performance persistence in mutual funds. Like many of the other factors, momentum is evident across many asset classes, including equities, bonds, currencies and commodities.

Momentum portfolios are generally implemented in one of two ways. Some institutional managers will construct long-short portfolios whereby they go long a group of stocks that have been top performers over the recent past, and go short a group of bottom performers.  Such a long-short portfolio captures the momentum premium, and has little if any correlation with traditional asset classes. Some managers, such as AQR, have created portfolios extracting momentum across a diverse set of asset classes, which because of the lack of correlation, creates an overall strategy with attractive risk-adjusted returns. The other primary way of implementing a momentum strategy is simply to go long the group of recent top performers, foregoing the short portfolio. While this strategy has significant beta exposure, it is more easily implemented for investors who either cannot, or prefer not to, use short positions.

The graph below shows the performance of the top decile stocks (“winners”), the bottom decile stocks (“losers”), and the long-short portfolio of “winners” minus “losers” over the period covering January 1927 through July 2013.