We continue to see a large gap between the primary and secondary markets as shown by the chart below. Primary mortgage yields continue to be significantly better in comparison to agency MBS yields. This gap between the primary and secondary market yields has been ongoing for the last six years and doesn’t appear to be converging anytime soon.
The table illustrates the funding strategy for the 30-year PLS. This scenario is being funded with 40% callable advances and 60% fixed advances. The PLS can use any mix of callable/fixed rate advances, and the chart at the right is one option. With this combination, we continue to see wide margins when keeping loans in portfolio as illustrated in both the 15- and 30-year scenarios.
Key Factors
The income and duration considerations below are from our 30-year mortgage scenario. They illustrate some key factors we consider when choosing a highlighted scenario. Duration and income are key elements in our selection, because we want to pick a strategy that not only hedges risk but remains profitable. The chosen strategy is very risk averse. We match duration closely while still generating strong income throughout many rate scenarios.
The mortgage and advance balance graphs show how the balances perform in an up 200 and down 100 rate environment. As shown in both graphs, we are able to provide a good funding mix that has the flexibility to manage varying mortgage prepayment speeds.
See our full analysis:
15-year Funding Strategy
30-year Funding Strategy