1
$\begingroup$

Several investors track indices to gain exposure to specific asset classes. And these indices may be re-balanced on a monthly basis, based on market-cap etc which generates month-end flows from investors replicating these indices. These flows can be determined to some extent.

In Agency MBS, investors tend to track the Bloomberg Barclays Agency MBS Index. It appears the index is tracked using TBAs rather than the pools which underlie the actual Index, which can result in tracking errors from settlement date differences, financing differences, etc. However, given this, is it possible to anticipate month-end flows from investors tracking this index, as is done in other asset classes?

$\endgroup$

1 Answer 1

1
$\begingroup$

To some extent, yes, although it is not straightforward. There are many different effects at play (in rough order of importance):

  • Month-end rebalancing between fixed-income and equities based on the relative performance of the two asset classes
  • Relative-value driven sectoral allocation of fixed-income flows across Corporates, MBS, High Yield etc
  • Addition of new issue pools to the Agency MBS index at month-end
  • Duration-related adjustments based on intra-month rate and volatility movements (TBAs have a different convexity profile than the MBS Index)

Furthermore, it is not easy for investors to position for these flows by tracking them over time because of the OTC nature of the MBS market. The best vantage point on flows is probably maintained by MBS pass-through trading desks and, to the best of my knowledge, they typically only position for month-end new-issue additions to the Index.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.