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Agency MBS Pass-Throughs

One-line definition

A pool of mortgages where scheduled principal, interest, and any prepayments are passed straight through to investors pro rata.

Mechanics

mortgage_amortization_schedule (in src/pm/fixed_income/mbs.py) gives the scheduled (no-prepayment) amortization. apply_prepayment overlays a prepayment assumption (an SMM per period) on top of it to get the actual principal paydown investors receive.

Why PMs care

Unlike a bullet bond, a pass-through's cash-flow timing is uncertain — it depends on borrower behavior (refinancing, moving, default), not just a fixed schedule. That uncertainty is the whole story of MBS risk.

Common mistakes

  • Pricing the scheduled amortisation as if it were the cash flow. mortgage_amortization_schedule gives the no-prepayment path; investors receive that plus prepayments, and the difference is the entire point of the instrument.
  • Treating an SMM as a CPR. SMM is the monthly rate, CPR the annualised one — single_monthly_mortality converts, and confusing the two misstates paydown by an order of magnitude.
  • Assuming a constant prepayment speed. Speeds respond to the refinancing incentive, which moves with rates. A single SMM is a scenario, not a forecast — see Prepayment models.
  • Using ordinary duration. Cash-flow timing changes when rates move, so the price/yield relationship turns negatively convex; effective duration is the measure that accounts for it.