#prepayment-risk

#prepayment-risk

When bond investors chase yield, they often overlook the engine that drives total returns: price appreciation from interest rate movements. The iShares MBS ETF (NYSEARCA:MBB) demonstrates this dynamic perfectly. While its 4% yield attracts income seekers, the fund has benefited from mortgage-backed securities price movements in recent periods. What MBB Actually Does MBB provides exposure to agency mortgage-backed securities, the bonds backed by Fannie Mae, Freddie Mac, and Ginnie Mae. These aren't the risky subprime mortgages from 2008. They carry implicit or explicit government guarantees, eliminating credit risk. What remains is interest rate sensitivity and prepayment risk.

Moody's data show that higher-leverage loans jumbo and conventional mortgages with debt-to-income ratios of 43.1% or higher now account for nearly 40% of new originations, up from about 20% in 2021. RMBS investors closely track delinquency rates which are expected to increase due to a weaker jobs market along with prepayment trends, when assessing risk. Amid declining rates and renewed refinancing opportunities, overall prepayments are expected to climb slightly, the analysts said.