Agency Mortgage Market Deeply Liquid According to New York Fed

According to researchers at the Federal Reserve Bank of New York ("FRBNY"), the market for agency MBS remains deeply liquid eight years after the financial crisis. As noted in a report published on February 8th, transaction costs have been relatively stable since 2011 when the Financial Industry Regulatory Authority began tracking that data minus one spike in the bid-ask spread in 2013. However, though the number of trades is stable, trading volume has declined partly owing to a decrease in the average trade size. While these measures of agency MBS trading activity suggest a decline in market liquidity, FRBNY argues that the measures of transaction costs and price impact suggest that liquidity conditions have been relatively stable since 2011. The report concludes, “It will be interesting to monitor liquidity conditions in this market as monetary policy is normalized, especially given the planned introduction of a single security designed to improve liquidity.”

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