Comparing Cashflow

We’ve been writing lately about the importance of cashflow in a rising rate scenario.  Principally, because the sooner you get cashflow back, the sooner you will be able to reinvest in a higher rate environment.   Thus, more community banks are utilizing mortgage-backed securities as part of a defensive strategy. 
 
Below we will compare the cashflow projections for two different mortgage pools and review the projected payment schedules to compare fundamentals. Both scenarios utilize similar prepayment models and an original face of $1,000,000. The second pool was issued in 2012, and so this has factored down to 0.38 of the original face, shown in the cashflow projection.
 
The first pool listed has a duration (a measure of price sensitivity to changes in interest rates) of 3.44 compared to the later pool with a duration of 4.36.  While the duration is only 0.92 apart, this translates to a projection of an additional four years of principal and interest payments.   In return for taking the additional risk of purchasing the longer pool, you are compensated with an additional 20 basis points of yield. 
 
Both pools are great options for bank portfolios and preferences will vary depending on your specific strategy.  To purchase either of the above securities, or for a side-by-side cashflow comparison please contact your CCB representative. 
 

FNMA3366: Fannie Mae Pool 10YR 3.5% Coupon
Offered at 102-01, Yielding 2.87%
Duration: 3.44, Final Maturity: 5/1/2028




FNBM1045: Fannie Mae Pool Seasoned 20YR 3.5% Coupon
Offered at 101-24, Yielding 3.07%
Duration: 4.36, Final Maturity: 6/1/2032
Current Factor: 0.38