Prepay Commentary

June Prepayment Speeds

July 10, 2017

MBS prepayments increased for the second month in a row and for the third time this year. Nominally, and percentage wise, these increases were very small. Slightly lower mortgage rates for the lock-in period in question, about 10bp lower than for the May window, combined with seasonal increases in home sales caused the increase. The small size of the increase and the reversal of these mortgage rate declines during the last two weeks suggest most portfolio managers will find no need to make adjustments in response to June prepayment speeds. This is especially true given how closely the outcome in terms of prepayment speeds resembled most forecasts.

Consistent prepayment increases occurred across most MBS collateral types. In general, the middle of the coupon stack posted slightly greater increases than the balance of outstanding issues, and pools with two to five years of seasoning showed the most consistent increases. However, the small and consistent nature of the increases leave little to pick apart in terms of analysis.

Thirty-year mortgage rates moved back in line with their year-to-date averages in response to the recent bond market selloff. The 3.93% conventional thirty-year mortgage quote from the Bankrate survey for Friday was 2bp below its year-to-date average, and at 3.17%, the fifteen-year conventional quote was 4bp above its average for the same period.

Calendar influences in July should push prepayment speeds slower, with 2 less application days than June. Otherwise, unless mortgage rates move significantly, next month should feature prepayment speeds consistent with those recently observed.