Volumes and Values for Fixed Income Securities Remain At Record Levels
DTCC’s Fixed Income Clearing Corporation (FICC) has been handling steep increases in the volume and value of securities processed since the credit crisis first began to sweep through financial markets in August 2007.
During the first five months of 2008, the volume of U.S. government securities trades ran almost 34% higher than the comparable period last year, and the value of trading climbed more than 27%. For mortgage-backed securities, transaction volume shot up 68% while value was up 41% over the January-May period in 2007.
In January 2008, mortgage-backed securities transactions handled by FICC set a record of $11.8 trillion as credit concerns again roiled markets. The previous $9 trillion record was set in August 2007 when the credit crisis began.
The value of trades handled by FICC’s Government Securities Division has followed a similar path, rising to $81.7 trillion in January 2008 from $69.4 trillion in December 2007 – and then hovering in the low $80-trillion range through April. In 2007, volume in this market peaked in August at $86.3 trillion, up sharply from $69.5 trillion the previous month.
Flight to quality
Some of the volume rise was attributable to a “flight to quality,” according to Murray Pozmanter, DTCC managing director, Clearance and Settlement Product Management. “When problems hit the credit markets last year, investors moved to mortgage securities issued by U.S. government-sponsored enterprises like Fannie Mae – and since the only mortgage securities we clear are those issued by government-sponsored agencies, our volumes naturally went up,” Pozmanter said.
In addition, as private issuers backed away from the market, the government-sponsored agencies took up some of the slack and increased their own issuance.
Washover effect
Initially, Pozmanter noted, the “flight to quality” showed up in the government securities market. Investors who no longer wished to put money into collateralized debt obligations and other structured finance products switched to U.S. Treasury bills and notes. Some investors moved out of corporate debt and, when ratings questions arose, out of municipal securities as well, and instead bought Treasury securities.
Further driving volume in the government securities market is the May 8 lifting of a five-year hold on GCF Repo transactions between customers that settle at the two different clearing banks. In the month following the end of the hold, GCF Repo trans-action volume soared to an average of $735.3 billion a day – the highest 30-day volume in FICC’s history for this product.
“There have been no problems handling this volume, either in our own shop or at the two settling banks, Bank of New York Mellon and JPMorgan Chase,” Pozmanter said. “The new methods set up to deal with fund imbalances are doing the job.” @