Agency MBS as Safe Assets

Measured as yield spreads against Treasury securities and AAA corporate bonds, the convenience premium of newly-issued agency MBS averages more than half of the long-term Treasury convenience premium. Agency MBS convenience premium and issuance amount vary negatively with mortgage rate, consistent with a prepayment-driven channel. The placing of agencies into conservatorship in 2008 and the introduction of liquidity regulations in 2013 affected MBS convenience premium significantly, consistent with government guarantee and regulatory treatment channels. Analyses of dispersion of dealers’ prepayment forecasts, seasoned MBS, and investors’ MBS holdings deliver further economic implications on agency MBS as safe assets