Can anybody elighten me on this, i dont know if its my hangover or just plain overcramming, im not understanding this. cheers
So do you understand the PAC tranche (or TAC or similar)? If you are the owner of a PAC tranche you know within some reason what principal you are going to be paid back at each payment. So if prepayments pick up or slow down some reasonable amount, you still get the same principal payments. This is a really good thing as it means that you have reliable cahs flow and you are insulated from people refinancing their mortgages to some extent. So if the PAC holders have really reliable cash flows, but the prepayments are variable who gets the variability? The Support tranche.
thanks a lot, great explanation…so this is like a garbage tranche? a sacrificial tranche for the sake of stability. A “i took one for the team” tranche? Why would anybody want to partake in the support tranch? cheers
Good investing is taking on every piece of risk you can find. A support tranche pays higher yield because you are taking on prepayment risk for people who can’t take it on themselves (PAC MBS are very popular with conservative institutional money). They are willing to pay you a decent rate to take on that risk. Support MBS might be a good choice in aggressive bond portfolios.