March MBS Prepayment Speeds
Fundamental factors overcame February’s short day count as MBS prepayments increased in February save the most premium coupons. Even with last month’s overall slowdown, most vintages are at or above their historical 3mo CPR.
Notables and Thoughts
- Generally, discount 15yr Fannie and Freddie’s saw speed increases while premium coupons slowed.
- The largest 30yr Fannie and Freddie increases were in 4.0 and 4.5 coupons.
- GNMA 30yr 4.5s posted a 28% increase (8.9 to 11.4 CPR) with the 2018 vintage posting a 60% increase (6.4 to 10.2 CPR).
- Many of our investors favor front-cashflow CMOs. Depending on the collateral, it may be worth considering a “cut-down” coupon (e.g. 4.0 coupon off of 4.5 collateral) to lower the price and prepayment risk.
Based on the Freddie Mac Primary Mortgage Market Survey, 30 and 15 year fixed-rate mortgage rates are down 10 and 16bps, respectively, from the beginning of 2019. Along with seasonal factors, this could point towards quicker speeds next month as well.
“An iShares exchange-traded fund that invests in mortgage-backed securities has raised $3.1 billion since the start of 2019, making it the third-most popular ETF so far this year, according to FactSet. Reasons for the surge in popularity: stock market mayhem and the Federal Reserve.”
Kevin A. Smith, CFA
SVP, Director Investment Product Strategies