Board of Governors of the Federal Reserve System

Figure 1. Trading Volume in 5-minute Increments on October 15, 2014

The figure is shown in two panels. In the top panel, trading volume on October 15, 2014 in 5-minute increments of the 10-year Treasury on-the-run security on the BrokerTec platform is shown, in addition to the median and 95th percentile of volume (over the period from September 30, 2011 to December 31, 2019). Trading volume exceeded its 95th percentile value by many multiples before and during the event window from 9:33 to 9:45 a.m. and BrokerTec volume for the 10-year benchmark security over the entire day remains the 2nd highest on record (at least since 2011), surpassed only on November 9, 2016, the day after the 2016 presidential election. After the event trading volume is often elevated about the 95th percentile, but generally by less than a factor of two.

In the bottom panel, trading volume on October 15, 2014 in 5-minute increments of 30-year Fannie Mae TBA securities, as observed in TRACE data, including all coupons but not roll transactions, by venue is shown. The bottom panel also shows the median, 75th and 95th percentiles of volume in 5-minute increments. It is clear that most activity throughout the day occurred between dealers and their customers, rather than on IDB platforms, as is the case on most any business day in the Agency MBS market. Like the Treasury market, activity in the Agency MBS market was historically high on the day, though not to the same extent. $82 billion of 30-year Fannie Mae TBAs traded on the day, which is in the 97th percentile of similar days since TRACE MBS reporting began, but only the 47th highest on record. Looking more broadly at trading activity in the 30-year Fannie Mae TBAs throughout the day, the also shows that a burst of historically high volume occurred at noon and between 1:45 and 3:30 p.m. Though activity in the Treasury market was also historically high at the time, it occurred on a far different scale than it did during the event window.

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Figure 2. Intraday 30-year Fannie Mae TBA & 10-year Treasury On-the-run Returns, October 15, 2014

The figure scatterplot intraday price returns on October 15, 2014 for 3.0%, 3.5%, 4.0% and 4.5% Fannie Mae TBAs for November delivery (y-axis) against intraday price returns for the 10-year Treasury on-the-run security (x-axis). Intraday returns for the TBA securities are calculated as log transaction price differences from their 8:00 a.m. levels on October 15, 2014. Intraday returns for the Treasury security are calculated using the mid-point of the best bid and offer on BrokerTec at the time of the corresponding TBA transaction. Points are color-coded by TBA coupon and points occurring in the event window between 9:33 and 9:45 a.m. are circled in black and labeled with their time of occurrence.

For the points occurring outside of the event window (generally to the left of 1.4% on the x-axis), the four scatters tightly fit four linear regressions (displayed as dotted lines). The slopes of the regression lines fall with coupon size, reflecting the distinct Treasury hedge ratios and prepayment expectations for the four securities. During the event window (generally to the right of 1.4% on the x-axis), the scatters fit regression lines relatively tightly for the 4.0% and 4.5% coupons but not for the 3.0% and 3.5% coupons. The 3.5% coupon (orange) appears to exhibit at least one large outlier, labeled at 9:40. See Table 2 for details of the linear regressions that are shown.

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Figure 3. Conditional Volatility of TBAs and Treasuries Following October 15, 2014

The figure displays realized daily volatility for the 10-year Treasury on-the-run security and the 30-year Fannie Mae production coupon TBA from September 15, 2014 to November 15, 2014. Realized daily volatility was calculated as the root mean square of 5-minute intraday returns for each trading day over the sample. The TBA production coupon is defined as that trading on a daily basis with the highest volume, subject to some ad-hoc smoothing. Changes day-to-day in the 10-year on-the-run CUSIP and 30-year Fannie Mae production coupon TBA throughout the course of the sample are controlled. Volatility rose during the day of the event and persisted for at least the day that followed, for both TBAs and Treasuries.

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