TBA Trading and Liquidity in the Agency MBS Market
James I. Vickery
Federal Reserve Bank of New York
Federal Reserve Banks - Federal Reserve Bank of New York
August 1, 2010
Economic Policy Review, Forthcoming
FRB of New York Staff Report No. 468
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.
Number of Pages in PDF File: 18
Keywords: mortgage-backed-securities, TBA trading, liquidity, adverse selection
JEL Classification: G21, G12, G19
Date posted: August 21, 2010 ; Last revised: January 22, 2013
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