May Prepay Trend Surprises Analysts.

Overall prepayment rates for mortgage-backed securities dropped 18.0% in May from a constant prepayment rate of 15.9 CPR to 13.1 CPR, defying analysts' expectations, according to Credit Suisse.

Writing in the "May 2008 Fixed Rate Prepayment Commentary," Credit Suisse researchers Mahesh Swaminathan and Chandrajit Bhattacharya reported that the results ran contrary to a consensus among analysts that speeds would be little changed.

"An anticipated boost from front-loading of June closings to avoid delivery fee increases did not materialize," the analysts said.

The speeds of 30-year 2006 and 2007 5.5%-6.5% coupons slowed 3-5 CPR, representing a 30% drop for 5.5s and 6.0s and a 23% decline for 6.5s, they reported.

The Credit Suisse analysts also reported that the estimated net issuance of fixed-rate MBS climbed from $48.5 billion in April to $67.4 billion in May, an increase of 39%.

The estimated net issuance of 30-year Fannie Mae and Freddie Mac MBS rose from $48 billion to $67 billion, while estimated issuance of 30-year Ginnie Mae securities grew from $11.7 billion to $14.5 billion, they said.

The analysts commented that the report "clearly highlights increased extension risk" and projected that if the response continues, "Servicers may further slow their models, potentially resulting in diminished duration buying in rallies and more duration shedding in sell-offs."