December 12, 2023 | Stamford, CT — Rising interest rates have unleashed a wave of volatility in U.S. mortgage backed securities (MBS) this year. As market participants prepare for projected growth in investment in mortgage products during 2024, buy-side and sell-side firms expect to increase spending on data, AI and other technology to upgrade risk-management capabilities for a more challenging and dynamic environment. 

A post-COVID jump in the average 30-year mortgage rate of almost 400 basis points in the span of just 10 months set the stage for a near “perfect storm” of volatility in MBS markets. Both the buy side and the sell side express serious concerns about inflation, the unprecedented speed of rate increases and risks associated with macro events like the 2023 regional bank crisis. In particular, fixed-income professionals taking part in a new study from Coalition Greenwich report serious concerns about recent reductions in both MBS market liquidity and transparency. 

“Today’s MBS market is much more complex than the market that existed before the pandemic,” says Audrey Blater, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Managing Mortgage Market Risk Becomes More Complex. “The current and unprecedented environment has changed investment behavior from a risk management and trading perspective." 

With An Uptick in Market Activity Expected, are Risk Management Systems up to the Task?
Despite the many challenges associated with higher rates—or perhaps because of them—more than 40% of investors participating in the Coalition Greenwich study expect to increase their MBS trading volume in 2024. 

Ramping up activity in a market that is increasingly difficult to forecast and hedge will force market participants to ensure their risk management processes and investment tools are up for the task. For both the buy side and the sell side, risk and other systems must have the capacity to consume more information and make meaningful sense out of it. Fortunately, the emergence of AI, machine learning and other advanced technologies are helping market participants shift price and factor estimation away from art and more toward science. 

“A surprisingly large share of market participants has yet to upgrade their risk-management processes and platforms,” says Audrey Blater. “As existing systems are put to the test in the months to come, we expect to see increased investments in real-time data and innovative technologies for risk management.”

Managing Mortgage Market Risk Becomes More Complex documents how buy-side and sell-side market participants perceive current conditions in the MBS market, how they see the market as changing since the start of the global pandemic, and what they see as the key challenges facing investors. The report analyzes the risk-management systems firms are using in their MBS investing and trading businesses and examines what changes firms have made in the past 12 months.