In my macro class a student (Mark or Steve… whatever!) asked about the size of the MBS market relative to Federal Reserve holdings. Here’s a nice description of the market:
Agency mortgage backed securities (henceforth “MBS”) are fixed income securities that entitle the owner to principal and interest payments on underlying residential mortgages that are guaranteed by Government Sponsored Enterprises (GSEs) such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Company (Freddie Mac), or government agencies such as the Government National Mortgage Association (Ginnie Mae). The MBS market is large, with over $7.5 trillion in outstanding debt at the end of 2013 according to the Financial Accounts of the United States. MBS fund residential investment and are used by a wide variety of market participants for investment and collateral purposes. A key feature of MBS is that the market is “liquid”. Specifically, market participants perceive that they are typically able to buy and sell significant quantities of MBS without difficulty and face relatively low transaction costs. Accordingly, many MBS investors hold these securities as a liquid investment that they expect can be quickly converted to cash at low cost when the need arises while earning a positive rate of return.
The Fed holds about $1.7 trillion of MBS, or about 23%. Fed purchases are given in Excel spreadsheets here.
MBS trading volume is many times larger than that observed in the corporate bond market. Daily MBS trading volume fluctuates between $10 and $80 billion per day while trading volume in a typical, U.S. corporate bond fluctuates between $15 and $40 million per day suggesting that MBS are much more liquid than U.S. corporate bonds. Finally, MBS and U.S. Treasury trading volumes are of a similar order of magnitude though MBS trading volumes are generally larger and somewhat more volatile.