Dollar Roll Financing in the TBA Market

TBA trading gave rise to the dollar roll as a mechanism for dealers to "borrow" pass-throughs they had sold short. In fact, a dollar roll is a contract to buy an amount of TBA pass-throughs for a close delivery date and sell the same amount of the same pass-throughs back for a more distant delivery date. Similar to a Treasury repo trade, the difference in buy-sell prices (the drop) implies a cost-of-carry or financing rate, given a prepayment assumption. (This expected financing rate, then, is subject to prepayment risk.) In general, in quoting the implied financing rate, the market starts with the consensus (mean) of MBS dealer prepayment projections.22 A generic pass-through is "rolling special" when the implied financing rate is below one-month LIBOR or some other relevant financing rate. It is common for a range of 30-year pass-throughs to roll well. Less commonly, the roll may heat up in a few 15-year coupons.

The dollar roll is a critical component of pass-through trading strategies and a vital cause and effect of demand (a hot roll feeds on itself). In general, the stronger the demand for a particular coupon from a particular agency (or sometimes, the tighter the supply), the more likely dealers will be short and have to

21. Roughly 99.9% of TBA trading volume settles in the defined notification and delivery process.

Communication and other technological advances today permit "TBA" trades to be settled for cash or any T + n delivery desired. However, these trades are rare. TBA trades also may have "stipulations," such as pools per million, WAM, or WALA range. Typically, a small markup is charged for "stips." Specified trades, in which the pool numbers are actually known, may trade for any delivery date as well.

22. Typically as quoted on Bloomberg.

resort to dollar roll transactions to settle trades. Demand for the roll drives the implied financing rate down. From their side, investors may use the roll either as a source of financing for TBA trades (so another characteristic of TBA trading is that it can be self-financing), or they may roll securities, taking the financing rate as a "yield sweetener" on their pass-through portfolio. Many of these "sellers of the roll" invest the drop in higher-yielding money market and other short-term securities to further boost yields. (They may keep the roll on for months at a time.) For this reason, how well a pass-through is rolling is an important determinant of its relative value either within a "coupon stack" or across agency pass-throughs of the same term and coupon. Likewise, how well a coupon is rolling is an important determinant of demand for it.

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Responses

  • maja
    What is a mortgage tba roll?
    5 years ago
  • ELIZABETH MARTIN
    What is roll financing?
    5 years ago
  • SUSANNE
    How are dollar rolls settled?
    5 years ago
  • balbo
    Are dollar rolls TBA securities?
    5 years ago
  • Katrin
    What are mbs dollar roll transactions?
    5 years ago
  • Anja
    WHY DO you roll tba mortgages?
    5 years ago
  • edvige
    What is dollar roll transaction?
    5 years ago
  • charlie
    What are tba stips pool per million?
    4 years ago
  • makda
    Why dollar rolls trade special?
    4 years ago
  • LEMPI
    Who settles tba mortgage market?
    4 years ago
  • gerontius
    How does dollar roll mbs financing work?
    4 years ago
  • Welde
    How does TBA market work?
    4 years ago
  • ines
    What is a dollar roll trade?
    4 years ago
  • christin
    How do tba mortgage securities roll work?
    3 years ago
  • sinit
    Who sells TBA mortgages?
    3 years ago
  • LORENZA
    How to calculate mbs dollar roll drop?
    3 years ago
  • doreen
    How does leverage work in the tba market?
    3 years ago
  • JONAS
    Is cash exchanged in a TBA dollar roll?
    3 years ago
  • kaari honkasalo
    Are dollar rolls repo financing?
    3 years ago
  • hugh crawford
    How to process tba dollar rolls?
    3 years ago
  • Palmira
    How to calculate "tba dollar roll"?
    3 years ago
  • lamberto manna
    How to calculate carry on TBA?
    2 years ago
  • philipp
    What are the risks of the dollar roll in real estate market?
    2 years ago
  • Thomas Paulsen
    How do rolls work in tba market?
    2 years ago
  • faryl
    Are dollar rolls senior securities?
    2 years ago
  • tesmi hagos
    How a TBA trade works?
    2 years ago
  • geneva brewer
    What is the notional amount of a TBA/mortgage Dollar roll?
    2 years ago
  • Paulina
    What is a dollar roll for TBA securities?
    2 years ago
  • MARINA
    Do mortgage pass through rolls represent leverage?
    1 year ago
  • teemu
    What is market drop on tba?
    1 year ago
  • Sirpa
    What is "buy the mortgage roll"?
    10 months ago
  • Ghenet Nuguse
    How to calc tba carry?
    10 months ago
  • Emma
    How do dollar rolls work?
    10 months ago

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