Prepayment risk and agency status push mortgage-backed yields a point above Treasury yields

Evidence

Because of the risk of pre-payment, and because the federal bodies involved are agencies, not the government itself, mortgage-backed securities trade at a discount to (or, to put it in other words, offer higher yields than) government bonds. Typically, the yield of mortgage-backed securities is about one percentage point higher than the yield of government bonds, and there can, for example, be profit opportunities if that difference widens or narrows for temporary reasons. — Donald MacKenzie, An Engine, Not a Camera, 958

Categorization

• XREF: Grounding for the later Mortgage Department performativity storyline - MBS pricing mechanics are the empirical substrate the models act upon. — connects to: Mortgage-backed arbitrage requires modeling borrower prepayment options and hedging them — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 963

Broader Connections

• Mortgage-backed arbitrage requires modeling borrower prepayment options and hedging them #expands (0.80) — Donald MacKenzie, An Engine, Not a Camera, 963