NEW YORK—The presence of the “to-be-announced” (TBA) market provides greater liquidity to the agency mortgage-backed-securities (MBS) market, according to a recent New York Fed study.
In their study, “TBA Trading and Liquidity in the Agency MBS Market,” authors James Vickery and Joshua Wright describe the mechanics of the TBA market and document its robust liquidity, even during the financial crisis.
The authors also present preliminary evidence that the liquidity of the TBA market raises MBS prices and lowers mortgage interest rates. This analysis makes use of the fact that not all agency mortgages and MBS are TBA-eligible. Based on this suggestive evidence, the liquidity benefit of TBA eligibility for agency MBS yields and mortgage interest rates is of the order of 10 to 25 basis points, as observed in 2009 and 2010.
The TBA market currently serves a valuable and important role in the mortgage finance system. Consequently, the authors suggest that “evaluations or proposed reforms to U.S. housing finance should take into account potential effects of those reforms on the operation of the TBA market and its liquidity.” To this end, the authors review the prospects for the TBA market amid the housing finance reform discussion.
James Vickery is a senior economist in the Research Group of the Federal Reserve Bank of New York. Joshua Wright is a policy and markets analyst on the open market trading desk of the Federal Reserve Bank of New York. Their study can be read in full in the latest Economic Policy Review.
TBA Trading and Liquidity in the Agency MBS Market »