Mortgage Dollar Roll

Mortgage dollar roll is the most common financing strategy for agency MBS. Effectively a collateralized loan, it differs from repos in two important ways: the returned collateral can differ from those received, and the MBS ownership changes hands in the funding period. Therefore, dollar roll ``specialness''--how much implied financing rates fall below MBS repo rates--is an important indicator of MBS funding conditions. Using a proprietary data set, we find that dollar roll specialness:(i) increases in the value of the cheapest-to-deliver option, (ii) decreases in the leverage of primary dealers, (iii) decreases in prepayment risk exposure during the financing period, and (iv) decreases in expected MBS returns. During its QE operation, the Federal Reserve's dollar roll sales are associated with lower specialness, consistent with its objective to mitigate the (negative) impact of QE on MBS funding market