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Report
Dealers and the Dealer of Last Resort: Evidence from the Agency MBS Markets in the COVID-19 Crisis
When market disruptions started in March 2020, dealers maintained the usual liquidity provision in the agency MBS market by taking cash inventory and hedging inventory risk with forward contracts. However, cash and forward prices significantly diverged and began to converge only after the Federal Reserve deployed nonstandard purchase operations to promptly take MBS off dealers’ balance sheets. Further cross-dealer analyses point to supplemental leverage ratio requirements as major constraints on dealers’ balance sheets. Customers’ selling increased when price divergence reverted, ...