Explaining Extension Risk Using Loan Pricing as an Example

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Posted To: MBS Commentary

Ever hear us say "mortgage rates rise much faster than they fall". This is a factor of extension risk and right now we're learning a painful lesson on what extension risk really means.... In the past 60 days we've seen FNCL 4.0s retrace four price handles. The production MBS coupon title belt has changed hands twice. 10 yr TSY note yields are almost 90bps higher. The 2s/10s curve is 45bps steeper. And the best 30 year fixed mortgage rates have risen about 75bps to 4.75%. It certainly didn't take long to unwind 6 months of positive progress did it? Investopedia defines "Extension Risk" as... Extension risk is mainly the result of rising interest rates and is generally associated with mortgage related securities. As interest rates rise, the likelihood of prepayment decreases. Since loans in a...(read more)

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