Early Signals Indicating Freddie TBA Headwinds

Forward UMBS TBA trading started last week, with those trades scheduled for June settlement. Historically, Fannie has dominated the TBA market, accounting for $142.5bn in trade volume for all of 2018 as compared to $20.4bn for Freddie as per SIFMA TRACE (the Ginnie II TBA accounts for $40.8bn in trade volume for 2018). While trading volumes of the Fannie TBA will roll into the UMBS TBA volume figure, Freddie TBA liquidity is expected to dry up, as the UMBS TBA was designed to merge the previously separate Fannie and Freddie TBA markets. Early market indicators suggest that appetite for Freddie TBA trading is already waning, as no June settlement Freddie TBA trades have executed thus far. In fact, about one month ago on the February 20 trading day there was a total trade volume of $108mm across all Freddie TBA cohorts for May settlement; while this number is small, it does indicate the presence of an active market. The lack of any Freddie TBA June settlement trades implies that the Freddie side of the TBA market will wind down perhaps sooner than some expected.

Furthermore, conclusions from the Fannie Mae and Freddie Mac Single Security Conference that took place on March 4 in New York City, support the notion of an impending Freddie TBA decline. A Freddie representative reported that they had disseminated a broad survey to their client base, with two-thirds of responders stating that they intend to exchange their Freddie Gold PCs into Mirror securities within six months after the June 3 go-live date for current settlement TBA. While it is still very early days for UMBS, recent market activity and sentiment suggest cautious adoption of UMBS and further eschewing of the Freddie TBA.

I was pleased to represent IHS Markit during the Service Provider discussion at the March 4 conference, during which I presented updates to our pricing models in response to the market transition to UMBS TBA. My discussion with the other service providers can be viewed here.

Posted 21 March 2019 by Tom Marecki, Associate Director, Bond Pricing, Securitized Products, S&P Global

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