Tactical GSEs, Banks Eye Seasoned 30s, and the Prepayment Friction from Closing Costs
Kirill Krylov discusses how a more stable but directionless rate environment is shifting MBS returns away from volatility-driven spread tightening and toward carry and demand support. He examines the evolving role of GSE buying, highlighting a transition from a steady policy bid to a more opportunistic, price-sensitive backstop that stabilizes spreads. The episode also explores a notable shift in bank behavior, as larger institutions begin to embrace seasoned 30-year MBS for their improved convexity and yield characteristics. Finally, Kirill highlights the growing importance of closing costs as a source of geographic prepayment dispersion, where transaction friction is increasingly shaping borrower behavior and call protection at the pool level.
