Bond Dealers See Agency MBS Spreads Narrow as Prepays Rise

Yield spreads on agency mortgage-backed securities (MBS) narrowed to historic tights in recent months as prepay speeds increase at Fannie Mae and Freddie Mac.

The factors pushing the trend are a combination of the federal program to buy agency MBS, solid demand from private investors, and a move at Fannie and Freddie to buy out delinquent loans, all which accelerate prepayment speeds.