Chapter Two
Price Dynamics of Mortages and Cash Flows
INVESTORS CONSIDERING an allocation of funds to the mortgage-backed security (MBS) market—no matter in what segment, whether private or agency; or in what form of security, whether interest -only (IO) strip, Federal National Mortgage Association (FNMA) pass-through, or inverse-floater class of a collateralized mortgage obligation (CMO) secured by Government National Mortgage Association (GNMA) MBS—must understand the price dynamics of mortgages and cash flows. To participate, fixed-income investors must be tempted away from the Treasury market, which offers liquid streams of certain cash flows over an uncertain interest-rate environment. The MBS market offers streams of uncertain cash ...