By the Numbers
Market turmoil lifts TBA trading volume
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.
Trading activity in mortgage-backed securities spiked last week, reaching the highest level since late 2021. Many money managers have been facing redemptions in actively managed bond funds, which have underperformed as interest rates moved higher, and chose to sell MBS to cover redemptions. Higher interest rates have also hurt performance at mortgage REITs, adding to agency MBS sales. The Federal Reserve and banks stepped in to buy the last time activity spiked. But with the Fed getting out and banks on the sidelines, spreads have widened to elicit demand from other investors.
Average trading volume jumped to nearly $350 billion a day in the week ending October 11, according to weekly Federal Reserve data. Activity fell the following week, although big week-to-week changes is the norm. The light blue line on the graph that smooths out the cyclical pattern also shows a large increase, to levels last reached in late 2021. Mortgages have underperformed absent investors with a large appetite for MBS—the Bloomberg MBS index OAS is nearing its widest level since late 2022, and month-to-date excess returns on the index are almost as negative as they were in March during the banking crisis.
Exhibit 1. Daily TBA trading volume reached the highest level since 2021.
The dark blue line is weekly trading volume, the light blue trend line is extracted using a Christiano-Fitzgerald filter. As of 10/18/2023.
Source: Federal Reserve, Santander US Capital Markets
Dollar roll activity also increased over the last couple of weeks, albeit not as dramatically as TBA activity (Exhibit 2). Daily trading of rolls reached the highest level since the start of the year. However, roll volume has been rising since March, probably a result of rising loan originations during the spring and summer. Despite the increase, roll trading volumes remain below the levels set from 2020 through 2022, and most dollar rolls continue to trade below carry. Roll usage seems more likely to fall as housing turnover slows over the next few months.
Exhibit 2. Dollar roll volume has increased since its low in March.
The dark blue line is weekly trading volume, the light blue trend line is extracted using a Christiano-Fitzgerald filter. As of 10/18/2023.
Source: Federal Reserve, Santander US Capital Markets
Specified pool trading activity has increased slightly over the last few months but does not appear to have been significantly influenced by the bout of selling by money managers and REITs (Exhibit 3). However, the week ending October 11 was the fourth most active week reported, so it is likely that the selling pushed spec pool trading a bit higher. The Federal Reserve began reporting this data at the start of 2022, so there is not as much history available as there is for TBA and roll volumes.
Exhibit 3. Specified pool trading volumes have trended higher since July.
The dark blue line is weekly trading volume, the light blue trend line is extracted using a Christiano-Fitzgerald filter. As of 10/18/2023.
Source: Federal Reserve, Santander US Capital Markets
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