Tba market liquidity and trading

This short-term interest and the price drop of the back month TBA repurchase are the sources of income generation in the dollar roll trading for investors, and many investors actively roll from one month into another, enjoying the benefit of the TBA market liquidity and exposure to MBS without the adverse consequences of receiving delivery of a less-than-desirable mortgage pool.

Additionally, some insurers may use TBA securities to hedge interest rate risk exposure arising from other rate-sensitive securities they may be holding. The risks of TBA investing are similar to those resulting from other mortgage-related investments, including interest rate and prepayment risks.

In addition, TBAs generally do not have varying structures. Moreover, other parts of Schedule D Part 3 through Part 5 do not even provide a Code field, leaving the Description field as the only place to note a particular holding or transaction as a TBA. Lastly, we noted in our analysis that there were wide variances in how the Description field was filled out for TBAs. Given this variability of terminology or lack of proper identification altogether, we believe that our totals in the analysis above are less than the actual amounts, albeit most likely not by a significant measure.

Although, technically, TBAs are not derivatives despite their forward commitment, some insurers may have classified them as such because these securities may have been used for hedging certain interest rate exposures. Therefore, we reviewed the intra-year trading activity as captured by Schedule D, Part 5, Long-Term Bonds and Stocks, and Schedule DB, Part A, Section 2, Derivatives in the latter, we deducted the prior year-end holdings to avoid double-counting , which revealed much broader insurer participation.

In terms of specific industry groups , life companies have been responsible for about Fraternal insurance companies were a distant second in TBA trading activity, contributing To determine insurer concentration within specific industry groups for TBA activity, we looked at the Schedule D, Part 1: Therefore, the fraternal industry exhibited the highest insurer concentration, even after taking other factors into account, with most transactions indicative of TBA usage for dollar rolls and a likely investment strategy of income generation.

We selected only one out of the four schedules reviewed in the analysis above in the interest of minimizing time and complexity, while still capturing a historical trend. Although that year peak activity was almost five times larger than in the past couple of years, it appears less striking when we overlay our insurer TBA activity data with the agency MBS issuance numbers Figure 3. In this context, the peak TBA activity by insurers in is, therefore, much less surprising than the fact that TBA activity has not been higher in recent years, especially in when the second-highest amount of MBS was issued between and The most obvious explanation for the decline in TBA activity is that, subsequent to the financial crisis, the majority of companies with sizable investments in mortgage-related securities have scaled back their exposure to them, having suffered serious losses during the crisis and having found a new sense of risk aversion or at least caution toward mortgage-related products.

Although mortgages underlying TBAs carry an explicit or implicit government agency guarantee, the perceived risk of any mortgage-related asset among investors has been noticeably higher since Lastly, another potential factor contributing to the lower TBA activity reported on Schedule D Long-term Bonds and its various parts could be a shift by some insurers toward reporting such activity on Schedule DB Derivatives instead, as that schedule has become more detailed and transparent in the recent years.

However, we have not performed extensive analysis of that conjecture at this time. Therefore, were we to aggregate the Schedule D and DB numbers for the past 10 years, they would still show a downward trend in insurer TBA activity, although likely with a less steep slope. The Agencies have historically played a vital role in the U. The Agencies serve as a cornerstone for the proper functioning of the TBA market and its resultant size and liquidity.

However, the Agencies, particularly Fannie Mae and Freddie Mac, are currently under intense scrutiny and reexamination, following their near default after the financial crisis and subsequent governmental conservatorship. Specified pool trading refers to agency RMBS trading outside the TBA market, where investors specify securities to be delivered into the pool, making it a substantially less liquid market.

By selling the front month TBA, the investor foregoes the delivery of the securities and operational issues that come with it, foregoes any coupons and prepayments that the TBA would generate in the interim, but has funds that can be reinvested in the short-term based on the London Interbank Offered Rate LIBOR. This short-term interest and the price drop of the back month TBA repurchase are the sources of income generation in the dollar roll trading for investors, and many investors actively roll from one month into another, enjoying the benefit of the TBA market liquidity and exposure to MBS without the adverse consequences of receiving delivery of a less-than-desirable mortgage pool.

Given this variability of terminology or lack of proper identification altogether, we believe that our totals in the analysis above are less than the actual amounts, albeit most likely not by a significant measure. Although, technically, TBAs are not derivatives despite their forward commitment, some insurers may have classified them as such because these securities may have been used for hedging certain interest rate exposures.

Therefore, we reviewed the intra-year trading activity as captured by Schedule D, Part 5, Long-Term Bonds and Stocks, and Schedule DB, Part A, Section 2, Derivatives in the latter, we deducted the prior year-end holdings to avoid double-counting , which revealed much broader insurer participation.

In this context, the peak TBA activity by insurers in is, therefore, much less surprising than the fact that TBA activity has not been higher in recent years, especially in when the second-highest amount of MBS was issued between and The most obvious explanation for the decline in TBA activity is that, subsequent to the financial crisis, the majority of companies with sizable investments in mortgage-related securities have scaled back their exposure to them, having suffered serious losses during the crisis and having found a new sense of risk aversion or at least caution toward mortgage-related products.