Investing in Mortgage-Backed and Asset-Backed Securities by Glenn M. Schultz

Author:Glenn M. Schultz
Language: eng
Format: epub
ISBN: 9781119221500
Publisher: Wiley
Published: 2016-02-01T00:00:00+00:00

The MBS 5.50% WAL is shorter 4.54 years versus 11.30 years, respectively. Due to the steepness of the curve its spread to the curve is higher (2.76 versus 1.16). In this case, the MBS 5.50% is said to offer a curve plus 160 bps spread pick-up.

Given the down 25 basis point interest rate scenario, the prepayment model predicts the MBS 5.50% weighted average life is 4.35 years and a yield to maturity of 3.50%, a decline of 15 basis points. Relative to the MBS 4.00%, the MBS 5.50% demonstrates a modestly higher of degree of call risk both in its relative average life change and its overall all yield decline.

Given the up 200-basis-point interest rate scenario, the MBS 5.50% exhibits a greater amount of extension risk; its average life extends from 4.54 to 10.31 years. Alternatively, the MBS 4.00% extends modestly from 11.30 to 12.77 years. The yield to maturity of the MBS 5.50% increases from 3.75% given the no-change interest scenario to 4.47% given the up 200-basis-point interest rate scenario. The higher relative yield of the MBS 5.50% versus MBS 4.00% is due to the delayed return of principal and its higher price.

The MBS 5.50% average life extension along the steep yield curve causes its spread to the curve to fall by 28 basis points. Furthermore, relative to the MBS 4.00%, its spread to the curve declines by a greater margin (28 bps versus 16 bps).

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