January 2020 MBS Prepayment Speeds
January factors are out and, overall, prepayment speeds were quite stable compared to the prior month. In the largest vintages, there was rarely a change up or down of even 1 CPR. Where we did see some slightly-larger increases, relatively speaking, were in GNMA 3.5s and 4.0s, the 2019 vintages to be more specific. 2019 vintage 3.5s increased from 5.6 to 13.9 CPR month-over-month while 4.0s increased from 27.2 to 38.5.
- The fastest 15-Year UMBS cohort for the month was 2018 production 15-Year 4.0s at a 27.1 CPR.
- The fastest 20-Year UMBS cohort for the month was 2018 production 20-Year 4.0s at a 27.8 CPR.
- The fastest 30-Year UMBS cohort for the month was 2018 production 30-Year 4.0s at a 32.3 CPR.
Food for Thought
It’s not necessarily surprising spreads have widened over the past year on MBS as prepayments have increased. Naturally, investors want extra compensation for prepayments to the extent they could affect their return. However, the degree to which spreads have widened out has certainly captured the attention of many investors.
Based on the Freddie Mac Primary Mortgage Market Survey, if we look back over the past year 30- and 15-year fixed-rate mortgage rates are 23 and 16 bps above their respective lows and are slightly higher since last month.
What We’re Reading
“Some debt investors are taking a second look at mortgage bonds after a summer slump pushed yields on the securities to their highest levels in years relative to U.S. Treasurys.”
“Short supply signals higher prices ahead, especially as demand picks up in the new year. Mortgage rates are still very low, giving buyers more purchasing power and fueling that demand further.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies
Analyst, Investment Product Strategies