How Bad is MBS Underperformance Right Now?

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Posted To: MBS Commentary

It's been plain to see in recent months that MBS have had a very tough time keeping pace with the drop in Treasury yields. That's been especially true of the past 2 months. Why is it happening? How bad is this from a historical standpoint? And will it change? The "whys" are fairly straightforward. Without any concern for the changes in the Fed's bond buying strategies, MBS are always going to suffer when there's a big, unexpected move in the broader bond market. The August rally definitely qualifies. Prepayment speeds are at the heart of the matter. If an investor can't be sure that a mortgage is going to stick around long enough for them to earn their interest, that mortgage becomes a less valuable investment relative to alternatives. Changes in the Fed's…(read more)

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