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TBA trading volumes remain strong
admin | December 20, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The mid-2019 launch of the new Uniform Mortgage-Backed Security may go down as one of the smoothest sweeping changes ever made to the agency MBS market. Both Fannie Mae and Freddie Mac pools became eligible for delivery into the same UMBS TBA contract. Almost seven months into the UMBS-era, TBA and dollar roll trading volumes remain healthy and the process for exchanging Gold pools for UMBS pools seems trouble-free.
TBA volumes were high throughout the second half of the year
TBA trading volume remained strong throughout the second half of 2019, peaking in October. Trading activity after the introduction of UMBS appears to have generally surpassed levels prior to UMBS (Exhibit 1).
Exhibit 1: TBA Trading Volume
Note: The dark blue line is weekly trading volume, the light blue is fit using LOESS to smooth seasonal variation. Source: Federal Reserve Bank of New York, Amherst Pierpont Securities
Activity peaked in July and October, both months coinciding with a pickup in prepayments and pool production following successive refinance waves. Activity has slowed a bit going into year-end, which could be due to seasonal slowdowns or possibly slowing prepayments. It seems pretty clear that UMBS did not slow, and probably has slightly increased, TBA trading volumes.
Dollar roll trading also remained high in the second half of the year
Dollar roll volumes were also high throughout the second half of 2019. After slowing during the two months preceding UMBS, dollar roll activity trended steadily higher and peaked in October (Exhibit 2). Similar to TBA, trading activity has fallen a bit into year-end.
Exhibit 2: Dollar Roll Volume
Note: The dark blue line is weekly trading volume, the light blue line is fit using LOESS to smooth seasonal variation. Source: Federal Reserve Bank of New York, Amherst Pierpont Securities
As with TBA trading, it appears that the UMBS contract has not hurt, and likely helped, increase dollar roll trading volume.
Freddie Mac exchanges slow down
The process for exchanging Freddie Mac pools into UMBS began in May and by all accounts has operated very smoothly. The initial volume of exchanges was very high, with nearly $90 billion converted by the end of May (Exhibit 3).
Exhibit 3: Freddie Mac Gold to UMBS Exchange Activity
Source: Freddie Mac, Amherst Pierpont Securities
However exchange activity has dropped substantially since the first three months, totaling less than $20 billion in November. Only $9 billion has been exchanged through December 18, which extrapolates to roughly $15 billion for December. There are about $1.3 trillion of Gold pools outstanding and still available to exchange, although roughly $215 billion of that is locked up in CMOs. So investors seem to feel little pressure to exchange pools, and when investors do want to exchange a pool, Freddie Mac should have plenty of capacity to do the transaction.
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