Fixed Income Market Structure: Treasuries vs. Agency MBS

This FEDS Note analyzes the structure of the agency mortgage-backed securities (MBS) market through the lens of the TRACE Treasury data initiative, which is a significant component of a broader inter-agency effort to enhance understanding and transparency of the Treasury securities market. As in several previous FEDS Notes describing the Treasury cash market structure, this note uses transactions reported to the Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE) to examine aggregate trading volumes in the agency MBS market across venues, security types and participants. We show how agency MBS provide a useful counterfactual to cash Treasuries when analyzing the evolution of Treasury cash market structure and its implications for liquidity. We provide evidence that the participation of Principal Trading Firms (PTFs) in Treasury markets has caused the overall volume of intermediation to rise there, particularly in the interdealer broker (IDB) venue. We also find that, relative to Treasury markets, intermediation in the agency MBS market is concentrated among fewer firms, and in particular the primary dealers, suggesting that PTF participation in Treasury markets has diversified intermediation in the IDB venue across a larger number of firms.