Agency MBS as Safe Assets

Measured as yield spreads against AAA corporate bonds, the convenience premium for agency MBS averaged 47 basis points between 1995 and 2021, about half of the long-term Treasury convenience premium. Both the MBS convenience premium and issuance amount vary negatively with the mortgage rate, consistent with a prepayment- driven demand channel. The placing of agencies into conservatorship in 2008 and the introduction of the liquidity coverage ratio in 2013 affected the convenience premium significantly, consistent with the safety and regulatory-constraint channels of demand for MBS. The ratio of MBS to Treasury convenience premia pinpoints the MBS-specific demand empirically.