Real estate, mortgages & credit cycle insights
Regular commentary on housing data, mortgage markets, CRE risk and how property interacts with the banking system.
legally mortgage backed securities are bonds since they are tradable debt securities
but they're not a plain bond, due to the option of borrower's early repayment
Macaulay or modified duration used for Treasuries doesn't work - you need effective/option-adjusted duration
the duration formula for MBS assumes for some pre-payments
if those happen at a smaller rate - the duration increases
raising yields means lower incentives to re-finance mortgages which reduces the amount of pre-payments
thus, the duration increases when yields are raising - so even a higher price decrease
optionality/convexity premium in mortgage backed securities is interesting
when market yields fall the price should rise, but since borrowers take advantage of lower mortgage rates to make early payments - the price does not raise as much, due to lowered duration
optionality/convexity premium in mortgage backed securities is interesting
when market yields fall the price should rise, but since borrowers take advantage of lower mortgage rates to make early payments - the price does not raise as much, due to lowered duration
Fed's balance sheet expansion with agency MBS reduced risks in liquidity, market depth and optionality/convexity
this is a crucial point to understand - it wasn't just the Fed buying agency MBS, but the explicit government guarantee that accompanied it
thus, the yields fell
to lower the mortgage rates the Fed can purchase agency MBS - likely they did in QE 1 2008
buying mortgage backed securities raises their price and provides liquidity for dealers. this directly pushes down the yields
expect some MBS QE to come in the near future
if you can actually take a loan of €10m - just get a bunch of properties in Portugal (I see the flag 🇵🇹😄) and rent them out
you'll be able to comfortably get ≈50 properties - yielding you around €50K MRR
plus all of the equity and appreciation that you're earning