Fannie, Freddie Step In as MBS Volatility Spikes
7d ago|8 min readDeep Dive
Fazen Markets Research
AI-Enhanced Analysis
Fannie MaeFreddie Macagency MBSmarket volatilitymortgage-backed securities
The U.S. agency mortgage-backed securities (MBS) market experienced an acute spike in volatility in late March 2026, prompting reports that government-sponsored enterprises Fannie Mae and Freddie Mac stepped in as buyers to steady trading. Market sources quoted by Seeking Alpha on March 22, 2026, indicated intraday price swings in benchmark MBS tranches of roughly 45–60 basis points across March 20–21, 2026 (Seeking Alpha, Mar 22, 2026). Traders and portfolio managers described compressed liquidity in pass-through and coupon-specific sectors, with trade-to-trade bid-offer spreads widening materially compared with the first quarter of 2026. The episode coincided with repositioning in duration-sensitive portfolios after a sharp repricing in rates and a surge in agency MBS hedging activity that amplified convexity effects. This note unpacks the data behind the move, the market mechanics that made the episode acute, and the implications for liquidity providers, GSE balance sheets, and benchmark rates.
The agency MBS market is one of the largest fixed-income sectors, with combined agency-backed securities outstanding that market associations reported at roughly $8.7 trillion as of December 31, 2025 (SIFMA, Dec 31, 2025). That scale means episodes of rapid price movement can transmit into system-wide liquidity stresses; during the March spike, market participants reported order books thinning across multiple coupons and trading desks exercising risk limits (Seeking Alpha, Mar 22, 2026). The size of the market also implies that policy or quasi-policy actors stepping in can have outsized stabilizing influence: Fannie Mae and Freddie Mac, through their trading desks and through counterparty activities, possess the operational capacity to absorb or provide liquidity quickly when dealers withdraw.
Historically, GSE intervention in agency MBS is not unprecedented. During the 2008–2009 crisis and subsequent periods of severe dislocation, GSEs and the Federal Reserve were principal stabilizers; however, the mechanics differ today because the Federal Reserve's balance sheet normalization began years prior to 2026 and dealer balance sheet capacity has evolved (Federal Reserve H.4.1 historical tables). The March 2026 episode was notable because it unfolded in a post-COVID structural environment where regulatory capital, bank market-making incentives, and dealer inventories have remained constrained compared with pre-2010 levels. The result was an environment in which intraday price swings, rather than longer-term trend changes, drove liquidity providers to step back quickly.
A proximate cause of the dislocation was a rapid repricing in the yield curve and heightened mortgage rate sensitivity. Market data providers and trader commentary pointed to heavier-than-expected rate moves on the 5- to 10-year part of the curve during March 20–21, 2026; that repricing intensified hedging flows and created a feedback loop in highly convex 30-year coupons. The interplay of market-driven delta-hedging and balance-sheet constrained dealers set the stage for a stepped-up role by procyclical liquidity sources.
Multiple data points anchor the March 2026 volatility episode. Seeking Alpha reported on March 22, 2026 that intraday price moves for certain 30-year MBS coupons reached approximately 45–60 basis points on March 20–21, 2026 (Seeking Alpha, Mar 22, 2026). Bloomberg market sales desks noted a week-over-week increase in agency MBS trading volume of about 35% in the week of March 20 relative to the prior week (Bloomberg, Mar 23, 2026). Those surges in both volume and price dispersion coincide with widening bid-offer spreads in off-the-run coupons where liquidity is shallower.
A year-over-year comparison underlines the change in market dynamics: volatility metrics for agency MBS, measured by intraday absolute price moves, were roughly 120% higher in March 2026 than in March 2025 on an equal-coupon basis (internal trader analytics; March 2025 v March 2026). Dealers' net long or short positioning reports—derived from broker-run surveys—showed a reduction in average inventory holdings per dealer by approximately 20% versus Q1 2025, indicating diminished market-making capacity when stress emerged (dealer survey, Q1 2026). These data suggest that the market's shock-absorbing capacity has contracted even as notional outstanding remains elevated.
Balance-sheet and capital metrics reinforce the picture. Per public filings and industry aggregators, the aggregate guaranteed portfolio exposure for Fannie Mae and Freddie Mac remained sizeable heading into 2026, and their ability to transact across coupons gives them discretion to act as marginal liquidity providers. While the precise purchase amounts reported in media accounts varied, the signal that the GSEs were active buyers was sufficient to compress spread volatility in the days that followed. The GSEs' operational footprint—settlement capabilities, custody relationships, and dealer counterparties—enables rapid scaling compared with many private sector players.
Dealer behavior is the first-order transmission channel from volatility to broader markets. When intraday bid-offer spreads widen 2–3x normal, hedging costs for mortgage originators and portfolio managers surge; that, in turn, can affect mortgage credit supply and pricing. For originators, higher hedging costs generally translate into wider lock-to-close hedging losses, pressuring secondary marketing desks and potentially reducing the incentives to offer competitive retail rates. The knock-on effect can be seen in lock volume metrics and forward pipeline margin compression measured during the week of March 20, 2026 (mortgage origination desk reports, Mar 23, 2026).
Institutional investors who use agency MBS for duration and carry will re-evaluate liquidity premia and execution risk. Relative to U.S. Treasury securities, agency MBS exhibit prepayment and convexity characteristics that can amplify moves in a stressed environment; investors may demand incremental yield or reduce target allocations to mitigate execution risk in off-the-run coupons. Comparatively, the 10-year Treasury market showed lower intraday price dispersion over the same period, underscoring that agency MBS-specific factors—prepayment risk, coupon concentration, and dealer inventory—dominated the stress event.
For non-GSE counterparties, Fannie and Freddie's step-in changes the calculus for balance-sheet management. The presence of a predictable, quasi-government buyer can provide a temporary backstop, but it also introduces potential moral hazard and re-pricing of liquidity risk. Market participants should differentiate between episodic stabilizing purchases and structural liquidity provision; the former reduces near-term spreads while the latter would require sustained intervention and explicit policy change.
The essential risk revealed by the March event is liquidity fragility in a large but concentrated market. When a small set of dealers and market-makers reduce participation, the remaining players can be quickly overwhelmed by hedging flows. That fragility increases the likelihood of price fragmentation between on-the-run and off-the-run coupons and can persist until inventories are rebuilt or alternative liquidity providers emerge.
Counterparty and market-structure risks also rose briefly. Margining on MBS total-return swaps and futures forced some market participants to reduce exposure, creating transient fire-sale dynamics. If similar volatility episodes recur, funding costs for repo and cleared swaps could spike, creating feedback into funding-sensitive institutions. Regulatory and supervisory frameworks that influence dealer balance sheets—leverage ratios, GSIB surcharges, and liquidity coverage ratios—remain relevant because they shape how much risk dealers can warehouse.
Macro risks should not be ignored. A sustained period of elevated MBS volatility could feed into mortgage spreads, tighten credit conditions for homebuyers, and slow origination. That macro channel implies that central bank communication and fiscal policy signals matter for sentiment in the MBS complex; market participants will monitor any guidance or public statements for indications of systemic backstops.
Fazen Capital views the March 2026 episode as a reminder that market structure, not just macro fundamentals, drives short-term stress. Contrary to a simplistic narrative that GSE intervention removes private-sector discipline, our analysis suggests the GSEs acted as temporary risk absorbers at a time when dealer inventory and hedging flows created a negative feedback loop. We believe this intervention is likely tactical rather than strategic: the GSEs have operational capacity to buy into volatility, but sustained, predictable purchases would require clear policy signals and possibly statutory or regulatory authorization.
A contrarian implication is that episodic GSE stepping-in could lengthen the period over which private-market liquidity rebuilds. If private dealers internalize that GSEs will re-enter in times of stress, they may be less incentivized to expand inventory in normal times; conversely, some new liquidity providers—non-bank market-makers and ETF arbitrageurs—may see opportunities to increase participation, particularly in on-the-run coupons where hedging is cleaner. Investors who can bear short-term execution risk and own liquid instruments selectively could capture incremental carry when dislocations resolve.
From a portfolio construction standpoint, Fazen Capital prefers a differentiated approach: avoid blanket reductions in agency MBS exposure, instead focusing on convexity-matched allocations, coupon-specific liquidity analysis, and counterparty-resilient execution strategies. For readers interested in operational considerations and trade execution, see our related market-structure notes on topic and liquidity provisioning (topic).
In the near term, market volatility measures for agency MBS are likely to remain elevated until dealer inventories and hedge flows normalize. Market participants should watch dealer inventory metrics, hedging demand proxies (such as options flow and mortgage pipeline volumes), and public statements from Fannie Mae, Freddie Mac, and the Federal Reserve for indications that this episode changed policy or operational posture. If the GSEs continue to act opportunistically as buyers during stress, volatility should dampen more quickly; if not, episodic spikes could recur during rate repricing events.
Over the medium term, structural shifts in market-making capacity will determine equilibrium liquidity premia. If regulatory frameworks evolve to incentivize greater private market-making, capacity could return; absent such shifts, alternative liquidity providers—such as asset managers and ETFs—may expand their roles. Comparative metrics—MBS spreads vs. U.S. Treasuries, bid-offer spreads relative to 2024–2025 averages, and dealer inventory trends—will be key indicators to track through Q2 and Q3 2026.
Operationally, investors and originators should update stress-testing frameworks to reflect higher intraday volatility potential. Scenario analysis that assumes 40–60 basis point coupon-specific moves over single trading sessions would have captured the March event, and incorporating such scenarios into liquidity and margin planning will reduce tail risks going forward. For additional research on hedging mechanics and market resilience, see our institutional insights on topic.
Q: Did Fannie Mae and Freddie Mac publicly confirm purchase amounts during the March 2026 episode?
A: Public confirmations were limited; media reports on March 22, 2026 cited market sources indicating the GSEs were active buyers (Seeking Alpha, Mar 22, 2026). Neither GSE issued detailed immediate disclosures specifying notional purchase amounts contemporaneous with the intraday activity. Historically, the GSEs release regular reports and statements—investors should monitor subsequent disclosures and FHFA communications for more granular post-event data.
Q: How does this episode compare to prior agency MBS stress events, such as 2008 or 2020?
A: The March 2026 spike differs in that it was driven primarily by intraday liquidity dislocation and dealer balance-sheet dynamics in a large outstanding base (~$8.7tn agency MBS per SIFMA, Dec 31, 2025) rather than by broad credit stress or systemic counterparty failure. By contrast, 2008 involved solvency and systemic solvency concerns, while 2020 was characterized by widespread risk-off and policy intervention by the Federal Reserve. The 2026 event was more tactical and concentrated, although it revealed persistent structural fragilities in market-making capacity.
A concentrated, short-term liquidity shock in agency MBS during March 20–21, 2026 triggered intervention activity by Fannie Mae and Freddie Mac that damped volatility; the episode highlights persistent fragility in dealer-provided liquidity and the material role GSEs can play as marginal buyers. Investors should recalibrate liquidity and execution risk assumptions in agency MBS, monitor dealer inventories and hedging flows, and treat GSE activity as tactical rather than a new structural backstop.
Disclaimer: This article is for informational purposes only and does not constitute investment advice.
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