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TBA trading and liquidity in the agency MBS market

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  • James Vickery
  • Joshua Wright

Abstract

Mortgage-backed securities in the United States are generally traded on a “to-be-announced,” or TBA, basis. The key feature of a TBA trade is that the identity of the securities to be delivered to the buyer is not specified exactly at the time of the trade, facilitating a liquid forward market. This article describes the main features of the TBA market. It also presents evidence on the liquidity of this market during the financial crisis period. Using variation in TBA eligibility rules, the authors’ estimates suggest that the liquidity benefits associated with the TBA market are of the order of 10 to 25 basis points during 2009 and 2010, and magnified during periods of market stress. The estimates further suggest that the presence of a government credit guarantee alone does not appear to be sufficient explanation for the liquidity of agency MBS.

Suggested Citation

  • James Vickery & Joshua Wright, 2013. "TBA trading and liquidity in the agency MBS market," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 1-18.
    • Handle: RePEc:fip:fednep:y:2013:i:may:p:1-18:n:v.19no.1
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    Cited by:

    1. Fuster, Andreas & Lo, Stephanie & Willen, Paul S., 2017. "The time-varying price of financial intermediation in the mortgage market," Staff Reports 805, Federal Reserve Bank of New York, revised 01 Aug 2017.
    2. Garbade, Kenneth D. & Keane, Frank M., 2017. "The Treasury Market Practices Group: creation and early initiatives," Staff Reports 822, Federal Reserve Bank of New York.
    3. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2013. "The ins and outs of LSAPs," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City.
    4. Andreas Fuster & James Vickery, 2015. "Securitization and the Fixed-Rate Mortgage," Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 176-211.
    5. W. Scott Frame & Andreas Fuster & Joseph Tracy & James Vickery, 2015. "The Rescue of Fannie Mae and Freddie Mac," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 25-52, Spring.
    6. Marco Di Maggio & Amir Kermani & Christopher Palmer, 2016. "How Quantitative Easing Works: Evidence on the Refinancing Channel," NBER Working Papers 22638, National Bureau of Economic Research, Inc.
    7. W. Scott Frame & Larry D. Wall & Lawrence J. White, 2012. "The devil's in the tail: residential mortgage finance and the U.S. Treasury," FRB Atlanta Working Paper 2012-12, Federal Reserve Bank of Atlanta.
    8. Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2012. "Liquidity and the Threat of Fraudulent Assets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 000.
    9. Cruz, Prince Christian & Gao, Yuning & Song, Lei Lei, 2014. "The People’s Republic of China’s Financial Markets: Are They Deep and Liquid Enough for Renminbi Internationalization?," ADBI Working Papers 477, Asian Development Bank Institute.
    10. Carlin, Bruce I. & Longstaff, Francis A. & Matoba, Kyle, 2014. "Disagreement and asset prices," Journal of Financial Economics, Elsevier, vol. 114(2), pages 226-238.
    11. Pellerin, Sabrina & Sabol, Steven & Walter, John R., 2013. "MBS Real Estate Investment Trusts: A Primer," Economic Quarterly, Federal Reserve Bank of Richmond, issue 3Q, pages 193-227.
    12. Fuster, Andreas & Goodman, Laurie & Lucca, David O. & Madar, Laurel & Molloy, Linsey & Willen, Paul S., 2013. "The rising gap between primary and secondary mortgage rates," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 17-39.
    13. Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, 2016. "Mortgage Risk and the Yield Curve," Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1220-1253.
    14. Friewald, Nils & Jankowitsch, Rainer & Subrahmanyam, Marti G., 2014. "To disclose or not to disclose: Transparency and liquidity in the structured product market," CFS Working Paper Series 461, Center for Financial Studies (CFS).
    15. repec:oup:revfin:v:21:y:2017:i:2:p:719-760. is not listed on IDEAS
    16. Pelizzon, Loriana & Subrahmanyam, Marti G. & Tomio, Davide & Uno, Jun, 2016. "Sovereign credit risk, liquidity, and European Central Bank intervention: Deus ex machina?," Journal of Financial Economics, Elsevier, vol. 122(1), pages 86-115.
    17. Bruce I. Carlin & Francis A. Longstaff & Kyle Matoba, 2012. "Disagreement and Asset Prices," NBER Working Papers 18619, National Bureau of Economic Research, Inc.
    18. Boyarchenko, Nina & Fuster, Andreas & Lucca, David O., 2014. "Understanding mortgage spreads," Staff Reports 674, Federal Reserve Bank of New York, revised 01 Jun 2018.
    19. Ingrid Gould Ellen & Mark Willis, 2012. "Comments on “Are the government-sponsored enterprises (GSEs) justified?”," Housing Policy Debate, Taylor & Francis Journals, vol. 22(2), pages 149-152, March.
    20. Peter Diep & Andrea L. Eisfeldt & Scott Richardson, 2016. "Prepayment Risk and Expected MBS Returns," NBER Working Papers 22851, National Bureau of Economic Research, Inc.
    21. Monnet, Cyril & Quintin, Erwan, 2017. "Limited disclosure and hidden orders in asset markets," Journal of Financial Economics, Elsevier, vol. 123(3), pages 602-616.
    22. Pelizzon, Loriana & Subrahmanyam, Marti G. & Tomio, Davide & Uno, Jun, 2015. "Sovereign credit risk, liquidity, and ECB intervention: Deus ex machina?," SAFE Working Paper Series 95, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    23. Swagel Phillip L., 2012. "The Future of U.S. Housing Finance Reform," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(3), pages 1-32, October.
    24. Bhat, Gauri & Ryan, Stephen G., 2015. "The impact of risk modeling on the market perception of banks’ estimated fair value gains and losses for financial instruments," Accounting, Organizations and Society, Elsevier, vol. 46(C), pages 81-95.
    25. Patricia C. Mosser & Joseph Tracy & Joshua Wright, 2013. "The capital structure and governance of a mortgage securitization utility," Staff Reports 644, Federal Reserve Bank of New York.

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