Though market players are not expecting the current dip in rates to cause prepayment speeds to shoot up to last year's levels, the market is still at the point where it could be vulnerable to a massive supply boom in MBS, said analysts.
"The potential for a supply surprise already exists," wrote MBS researchers from Deutsche Bank in a recent report. According to the firm, they had predicted a total net supply of $300 billion fixed-rate agency MBS for 2002 at the beginning of the year. However, supply numbers have already reached $94 billion in the first quarter alone. The bank has since increased its net supply forecast to $350 billion for 2002 (compared to $362 billion for the previous year).