Introducing 2.5% MBS Coupons

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Posted To: MBS Commentary

The title is a bit misleading. 2.5% coupons are nothing new–especially if we're talking about 15yr MBS. Even in 30yr MBS, 2.5s were being traded as far back as 2012. This is only logical considering the prevalence of 30yr fixed rates in the low 3% range at the time. But while 2.5s were trading, they were never in the same league as 3.0 coupons in terms of volume and liquidity. Even now, as 2.5s are enjoying another resurgence (as they did in 2016), they are still valued based on math applied to 3.0s. In essence, 3.0s are a known known–a rosetta stone of MBS price discovery that allows traders to arrive at a value for other coupons without actually being able to trade those other coupons as readily. Because of this, it hasn't made any sense follow 2.5 prices. DISCLAIMER: It STILL doesn't…(read more)

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