June MBS Prepayment Speeds
July 9, 2018
Lower coupon MBS prepayment speeds accelerated slightly in June, while higher coupons and more seasoned pools slowed slightly. Seasonal factors, most notably increased housing turnover, contributed to the faster speeds on the non-refinanceable portion of the MBS coupon stack, and the size of the increases fit well with the seasonal influence. The lower day count – one less business day – exerted minimal impacts on home purchases, as weekend shoppers selected homes and arranged closings based on personal situations. Meanwhile, one less business day versus May combined with slightly higher mortgage rates suppressed refinancing activity.
MBS yields and the corresponding mortgage rates held fairly steady from mid-February through mid- April, with thirty-year conventional rates mostly holding in a range from 4.25% to 4.375%. An approximately 25bp increase in thirty-year MBS yields and mortgage rates mid-April ushered in a modest increase in interest rate volatility, with thirty-year conventional rates ranging in a larger and slightly higher range from 4.375% to 4.6125%. June prepayments speeds should almost fully reflect the mortgage rate increases from April, so as long as mortgage rates continue to bounce around within their current range, a very gradual slowdown of prepayment speeds with the usual monthly variations from day count and seasonal factors should continue.
Director of Investment Product Strategies