With the continuing rally that has brought the 10-year Treasury to below 4.60%, mortgage rates down nearly 50 basis points from July's high, and refinancing activity finally showing response to the improved rate levels, revisions are starting to show up in analysts' prepayment projections. This is most noticeable in the premium coupons.

Currently, September speeds are forecast to slow 11% to13% in 4.5% through moderately seasoned 5.5% coupons. Speeds on more seasoned 5.5s through 6.5s range from 9% slower to 2% slower, respectively, versus previous expectations of 10% to 5% slower compared to August's levels.

The primary reason for the slowing in September is due to three less collection days as well as slowing seasonals. However, the rally in August and into September is offsetting the decline to some extent as refinancing activity has steadily picked up. For August, 30-year fixed mortgage rates averaged 6.52% compared to 6.76% in July, while the average of 1584 on the Mortgage Banker's Association's Refinance Index was up nearly 14% over July. For the first three weeks of September, the Refinance Index has averaged 1674, up 6% from August's average. Meanwhile, 30-year fixed mortgage rates averaged 6.40% in September, down 12 basis points from August's average.

The September prepayment reports are released this Thursday evening. Paydowns were estimated to be close to $40 billion.

More of the influence of the decline in rates and pick up in refinance activity is anticipated to show up in the October and November prepayment reports. Speeds are expected to increase around 6% to 9% in October, helped as well by a higher day count. In November, speeds are predicted to slow 6% or less. Previously, speeds were estimated to decline 8% to 10% from October's levels.

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