Defragmenting Markets: Evidence from Agency MBS

Agency mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac have historically traded in separate forward markets. We study the consequences of this fragmentation, showing that market liquidity endogenously concentrated MBS, leading to higher issuance trading volume, lower transaction costs, security prices, a primary cost capital for Mae. then analyze change design—the Single Security Initiative—which consolidated MBS into single June 2019. find consolidation increased prices without measurably reducing Mae; was part achieved aligning characteristics underlying pools two agencies. Prices partially converged prior event, anticipation future liquidity. Consolidation Mac’s fee income enabling it remove discounts previously compensated loan sellers