June prepayments are expected to be relatively flat overall, with slight gains expected in discount coupons while par and premium coupons are projected to decline slightly from May's levels. The lower coupons should benefit from seasonals.
During the period influencing the activity, mortgage rates were slightly higher at 6.61% on average in May, versus 6.51% in April, while refinancing activity was down about 5% on average based on the Refinance Index averages for May and April. The number of collection days holds steady at 22 days.
However, UBS analysts expect that the higher mortgage rates in May versus April to reduce premium speeds and further dampen cash-out activities across all coupons. "Overall, in next month's report, we expect discount speeds to be flat, and premium speeds to be down 5% to10%," analysts said. They also anticipate hybrid prepayment speeds to remain fast, similar to what was seen last month with an increasing number of 2003 3/1s reaching their first reset.
Looking forward to July and August, speeds are estimated to drop about 10% in July, on a lower day count and recover in August, on a higher day count.
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