Operation Twist, which was set to expire at the end of December, was replaced with Treasury purchases of the same amount at $45 billion per month. Bank of America Merrill Lynch (BAC) analysts say they expected this move all along.
"Consistent with our expectations, the Fed moved its purchases to slightly shorter maturities while maintaining the same net duration impact as Operation twist," BofA-Merrill Lynch said in its report.
The Federal Reserve will continue its purchase of $40 billion per month in mortgage-backed securities and reinvest the roll-offs.
The duration of the open-ended third round of quantitative easing program will be determined by "sustained improvements in labor conditions," the banking analysts said.
BofAML's research team interprets this to mean several quarters of more than 200,000 job growth, an increase in the employment-to-population ratio and a continued decline in unemployment.
"We expect the thresholds to be lower than those indicated for the rate guidance as asset purchases should stop about 9 to 12 months prior to the first Fed hike due to the need to drain reserves," the report said.
The duration of QE3 is expected until 2014, which would help increase the Fed balance sheet by a further $2 trillion, the analysts said.
Click on the table to view duration impact of Fed purchase programs.
Fed chairman Ben Bernanke stated the decline in MBS yield will not stop investors from returning to the markets when the Fed agrees to sell its holdings during a question-and-answer session on Wednesday.