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July 2020 Revised March 2026
JEL classification: D8, G2
Authors: Jiakai Chen, Haoyang Liu, Asani Sarkar, and Zhaogang Song
When market disruptions began in March 2020, dealers maintained their usual liquidity provision in the agency MBS market by absorbing cash inventory and hedging inventory risk with forward contracts. Nevertheless, cash and forward prices diverged sharply and began to converge only after the Federal Reserve implemented nonstandard purchase operations that promptly removed MBS from dealers’ balance sheets. Further cross-dealer analyses identify supplemental leverage ratio requirements as a key constraint on dealers’ balance sheets. Finally, customer selling increased precisely when price divergence reversed, contradicting the conjecture—advanced in some studies—that customer selling pressure was the primary driver of the disruptions.
I, Jiakai Chen, declare that I have no relevant or material financial interests that relate to the research described in the paper titled “Cash-Forward Arbitrage and Dealer Capital in the MBS Markets: COVID-19 and Beyond,” co-authored with Haoyang Liu, Asani Sarkar, and Zhaogang Song. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Haoyang Liu
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Asani Sarkar
The author declares that (s)he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Zhaogang Song
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
