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Mortgage-Backed Securities

Andreas Fuster, David O. Lucca and James Vickery, Federal Reserve Bank of New York (Staff Reports) · 2022

Mortgage rates are priced off MBS, not the policy rate. This survey explains prepayment risk, negative convexity and the option-adjusted spread, the vocabulary of any fixed income or securitised products interview.

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1 idea from this research

  • FrameworkMacro and rates

    Mortgage bonds shorten exactly when you least want them to

    A prepayable bond gets shorter when rates fall and longer when they rise; the spread you are paid is for that asymmetry.

    Fixed income, securitised products and mortgage finance interviews, and any question about why mortgage rates move with MBS rather than the policy rate.