Allow me to preface this by stating this is my belief in how it would work. I've never read a description of it but I know that money is created and destroyed and this is how I believe it works. Someone will hopefully correct any errors I make. Even if I am basically right I would not be surprised if one or more details are off.

Much of the so-called "money" in the banking system is created and destroyed by accounting journal entries.

When the Fed bought the bonds they simply credited the reserve account of the bank holding the demand deposit account of the bond seller and the bank credited the seller's deposit account.

If a commercial bank customer pays off an RMBS what will happen is:

1) As part of clearing the check, the bank will debit (reduce a liability) the customer's deposit account, decreasing the bank's demand deposit liabilities. They will credit (reduce an asset) their reserves by an equal amount. Thus both assets and liabilities decrease by the same amount. Demand deposit money shrinks.

2) Within the Federal Reserve System the check will be cleared and the bank will lose an equal amount of reserves to the Fed (the Federal Reserve Bank with which the commercial bank holds its reserves will debit (reduce a liability) the commercial bank's reserve account). No corresponding credit to another bank's reserve account will or can be made and no credit is made to another demand deposit account. Poof, the reserves and demand deposit money are gone. On the asset side the RMBS will be credited (reduce an asset) by the same amount to balance the books. . This is similar to what happens at the demand deposit level when money is destroyed as principal on a loan is repaid to a bank by a retail customer.

Government bonds are a little more involved but the end result is the same. IMO, the money is not destroyed when the Treasury pays off the bond. That just makes it permanent if the Fed does not go out and buy more assets. The money is destroyed through tax payments and/or the selling of another bond, which provides the money the Treasury needs to pay off the bond. But in a way this is quibbling.

Why is this? The Treasury account is kept within the Federal Reserve System, not a commercial bank. As a consequence of this:

1) The Treasury account is not part of the money supply.

2) Payments to the Treasury destroy demand deposits and reserves as the payment to the Treasury is actually from your bank's reserves to the Treasury's deposit account. So within the Federal Reserve system the reserves are "destroyed" by moving from one liability account (reserves) to another Treasury deposit), so accounting-wise it is a reclassification of liabilities with nothing happening on the asset side.

Normally, this is a temporary phenomenon as the money will be spent back into the economy by the government, including bond payments for publicly held bonds. The Treasury payment causes a commercial bank demand deposit account to be credited and the funds move back out of the Treasury account and are credited to the reserve account of the bank holding the deposit account that received the payment.

But if the payments go to the Fed the Treasury account money is not credited to any other bank and just goes poof again, unless the Fed turns around and buys an equal amount of bonds again. If they stop these purchases the money and reserves never make it back to the commercial banking system from the Treasury. The offsetting entry to the decrease in Treasury liabilities is an equal adjustment downward (credit) to the bond assets.

As I said above, this probably isn't exactly what happens but a key point to remember is that when the Fed receives a payment they don't go and deposit it anywhere. They just make adjustments to the books. The money comes from nowhere and vanishes just as easily. Money comes out of the commercial banking system and does not re-enter it.