Short Term CPR Predictions for Agency MBS: August 2022

Driven by a 90 basis point drop in 10 Year Treasury yields, conforming mortgage rates peaked in mid-June and then rallied more than 80 basis points by Aug 1st. Mortgage rates have since backed up 18 basis points, but the relatively lower rate environment compared to two months prior is driving a rebound in forecasted prepayment speeds for many coupons and cohorts.

 CPRs for more recent production cohorts (2019-2021) are bottoming out in July or August, and then are projected to speed up modestly in September and October. This contrasts with older production 2018 and older production in 3.5’s and higher coupons, where speeds are forecasted to continue slowing through October.

The CPR reversal of the new production, and overall faster CPR speeds, indicates more prepayment optionality and higher negative convexity than the more seasoned counterparts. At a broad market level, overall dispersion of CPR speeds across the entire 30 Year UMBS universe is expected to bottom out in September, then rise in October.