The conventional 30-year prepayment reports for May were uneventful.  The 30-year FNMA speeds were in line with expectations.

The reports showed the 5% and 5.5% coupons increasing slightly over 100% from April, as delinquency buyouts were concentrated in these coupons. Meanwhile, the 6s declined 61% following their big buyout purge in April to a post buyout average of 27 CPR, according to eMBS

The prepayment speeds on 6.5s also remained tame at between 26 and 31 CPR for 2006 through 2008 vintages, and between 27 and 35 CPR for 7s.

FHLMC Gold speeds declined 11% on average in May, which is slightly more than the 6% that was expected.

Contributing to the decline was a lower number of collection days 20 in May compared with 22.5 in April, and a 20% decline in the Mortgage Bankers Association's (MBA) Refinance Index on average in April in response to higher mortgage rates, ongoing tight credit standards, and still underwater housing values for many homeowners.

Meanwhile, GNMA speeds were faster than expected across the board. Contributing to this was a jump in buyouts from JPMorgan Chase where speeds surged nearly 115% to 25.1 CPR.

Overall, eMBS reported that FNMA MBS prepaid at 27.0 CPR in May, down 7.2% from April's 29.1 average; FHLMC Golds fell 12% to 14.7 CPR; and GNMA came in at 13.0 CPR, up 10.2% for the month.

Gross issuance for all three agencies totaled $86.3 billion, paydowns were $103 billion, putting net issuance at a negative $17.1 billion.

June prepayment speeds are expected to increase as the day count jumps to 23 days, while refinancing activity surged 36% on average for the MBA's Refinance Index as mortgage rates plummeted 21 basis points on average.

Still, voluntary prepayments will be at relatively muted levels as many coupons and vintages remain credit impaired, and thus unable to take advantage of historically low mortgage rate levels.

Barclays Capital analysts believe the no point rate would have to fall under 4.75% to lead to a significant pickup in refinancings and speeds  — primarily for 2009 vintage 4.5s and 5s. Analysts estimated the 10-year note would have to plunge to under 2.80% for this to be achieved.

With FNMA's buyout purge complete, paydowns should return to a more normal level of between $70 and $80 bln from the over $100 billion seen over the past four months. As such, net supply should also start to pick up.

Credit Suisse projected a sharp pickup of $15 billion to $20 billion in net supply beginning in June as FNMA buyout paydowns will be sharply reduced.

As a result, they suggested that the MBS basis could be more volatile in rallies in the second half of the year.

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