Earlier this month, driven by the February expiry of TBA futures from CME Group, investors took physical delivery of more than 100 contracts from the Fixed Income Clearing Corporation (FICC). This represents a significant increase in the physical delivery of TBA forwards underlying CME Group’s TBA futures, signaling that market participants are verifying their delivery readiness in preparation for growth in TBA futures activity.
As liquidity has picked up in TBA futures, so has the increase in the number of market makers. With four on-screen market makers now supporting growing volumes, we are seeing continuous two-sided markets at competitive bid-ask spreads that are, for some market participants, much better than quotes received in the OTC TBA market. In addition to electronic trading on the CLOB, we have also seen over 500 contracts trade in blocks.
TBA futures have already seen support from banks, hedge funds, mortgage originators, and asset managers. Proprietary traders are also using TBA futures to complement relative value strategies.
Interest in TBA futures may be growing as historically wide spreads between mortgage rates and Treasury yields have begun to narrow recently. This can be seen in the below chart, where the spread between the MIAC 30-Year current coupon rate and the BrokerTec 10-Year U.S. Treasury Benchmark rate has narrowed over the prior few months.
Exhibit 1: Mortgage spread tightening from all time wide
TBA futures are designed to enable investors to easily position for such spread moves. TBA futures and CME Group’s 10-Year Treasury Note futures have a notional value of $100K, streamlining the execution of inter-commodity spread trades between the two contracts. In addition, margin offsets make positioning for this type of trade extremely balance sheet efficient. More information can be found on CME Group’s website.
Open Interest (OI) in the March TBA futures contract has already grown significantly, and April TBA futures are beginning to see open interest and volumes build, especially at the top end of the coupon stack. The May contract now increases the size of the stack to include 6.5% coupons.
With the coupon stack offering outright and spread opportunities for coupons ranging from 2.0% to 6.5%, ICS opportunities within the stack and versus Treasury futures, and a rapidly growing ecosystem, one thing is for certain: this is a space to watch.
Gain access to the MBS market
TBA futures trade via an all-to-all electronic order book, bringing equal access, transparent price discovery, and streaming liquidity to the Mortgage-Backed Securities (MBS) market.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.