July MBS Prepayment Speeds
August 7, 2018
Prepayments speeds drifted lower by small amounts last month for most MBS coupons and cohorts. No interesting surprises appeared in the numbers. The gradual nature of recent upward trends in mortgage rates produces a gradual downward trajectory for baseline mortgage prepayment speeds, especially in the higher coupons. Seasonal housing turnover patterns also suppressed prepayment speeds and this affected all speeds. Therefore, even MBS coupons trading at discount prices slowed slightly for July.
MBS yields and corresponding mortgage rates moved in a directionless manner subsequent to the big jump in late April. However, bond market volatility increased and mortgage rates dipped briefly in late May and again in early July, with 30yr conventional rates moving down to about 4.375% both times. These brief rate opportunities and a greater day count should buoy August prepayments by small amounts. The long term trend toward slower prepayments should prevail over the following months as long as mortgage rates remain in proximity to current levels, with most 30yr conventional quotes at or just below 4.5%.
Director of Investment Product Strategies