HI guys, In SS10 they refer to the LTCM collapse and their use of MBS. Can someone explain when the Fed increased the interest rate, the MBS duration increase and had a negative impact on the LTCM portfolio. What is the relation MBS, rising interest rate, and duration? Please advise Thanks
An increase in rates will result in less people refinancing their homes, which decreases the prepayment rate associated with the MBS. A lower prepayment rate effectively increases the duration of the security because cash flows will come later than previously expected.
[Interest Rates - UP]–> [Incentive of the home-loan-borrowers to refinance - DOWN] --> [Prepayments - DOWN] --> [Cash Flow into the Mortgage Pool - DECREASES] --> [Extension Risk - INCREASES] --> [Liquidity Crises & Default]
Dinesh … go to bed LOL
florinpop Wrote: ------------------------------------------------------- > Dinesh … go to bed LOL LOL florinpop… are we the only 2 alive? I see we both hitting the same threads. Anyway’s I’ll drop-off. Monday sucks, Office sucks!!
oversun is around maybe you can give us a hand with the other thread we are debating on 
florinpop - I already did my bit there http://www.analystforum.com/phorums/read.php?12,676579,676614#msg-676614 but since it’s FSA, we wait for expert opinions on it!!