Drivers and Limits of Forecasting Agency MBS Index Rebalancing Flows

Summary

This discussion considers whether investors’ month-end trades tracking the Bloomberg Barclays Agency MBS Index can be anticipated. It explains that index replication in agency mortgage-backed securities often uses TBA contracts rather than the underlying pools, so settlement timing and financing differences can create tracking error. The answer identifies several sources of month-end activity: shifts between equities and fixed income after relative performance changes, allocation changes among fixed-income sectors, additions of newly issued pools, and duration adjustments in response to rate and volatility movements.

These influences provide a framework for monitoring potential flows, but they do not amount to a precise forecasting model or quantified evidence. TBA contracts also differ from the index’s pools in convexity, complicating duration-based estimates. Because the market is over the counter, flow data are difficult to track consistently. The response suggests that trading desks may have the best visibility and that positioning is commonly focused on new-issue index additions, while broader flow anticipation remains difficult.

Key ideas

• Agency MBS index trackers may use TBAs, creating differences from the underlying pools in settlement and financing.
• Month-end flows can reflect cross-asset rebalancing, fixed-income sector allocation, new issues, and duration adjustments.
• TBA convexity can differ from the index pools, complicating duration-based flow estimates.
• The over-the-counter market makes flow tracking difficult, and the discussion offers no quantified forecasting method.

Tags

# MBS Index replication month-end flows


# MBS Index replication month-end flows












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?

## Answer by Sharad (score 1, accepted)

https://quant.stackexchange.com/a/71091

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.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.