Due to the way effective duration and convexity are defined, when we perform a parallel yield curve shift, we would like all the mortgage current coupons to shift by the same amount as Treasuries or swap rates.
The first measure of error used to compare the four sets of independent variables and the two estimation techniques was the square root of the sum over all nine coupon types of all of the squared errors divided by the number of current coupons. (2) This measure of error utilizes the constant term from the regression, which is equivalent to using an average spread.
approach to forecasting mortgage current coupon as a function of either Treasury or swap rates.
The current coupon is the semi-annual equivalent of the parity-price interpolated coupon, based upon the two bonds whose price bracket the parity price.
Exhibit 1 is a scatter plot of FNMA 30 year current coupon versus ten-year Treasuries and versus ten-year swap rates on the same scale.
Next, we give an example of a model that simply uses the ten-year Treasury plus a spread to predict the FNMA current coupon. The spread between current coupon and the ten-year Treasury rate in the first month of analysis, November 1991, was used;
The actual value of the FNMA 30 current coupon for August 2000 was 7.7; therefore the prediction using the ten-year Treasury and spread was 107 basis points off.
According to REIT secretary Stephanie Leggett Young, who clarified the matter, only a portion of those were re-purchased, 36.4 percent of the current coupons
and 38.4 percent of the zeros.
The single-family housing recovery will continue, which will particularly raise prepayments of seasoned discount and current coupons. Refinancing will be much less rampant than 1992, although it will remain active.
The 10 to 15 basis point widening in the yield spreads will hamper the performance of discount and current coupons. High-premium (9.5 percent and higher) coupons, however, will do well.