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Use Case — MBS Extension Scenario

PM question

A portfolio holds a $1,000,000 face, 6% WAC agency MBS pool, 30-year amortization. Rates rise sharply to 8%. How does the pool's weighted average life (WAL) respond, and why is that the opposite of what a normal (positively convex) bond would do?

Concepts

prepayment (CPR/SMM), refinancing incentive, weighted average life, extension risk, negative convexity.

First exercise

Using pm.fixed_income.mbs.mortgage_amortization_schedule, refinancing_incentive_cpr, single_monthly_mortality, apply_prepayment, and weighted_average_life:

  1. compute WAL at a 4% market rate (rates fall — refinancing incentive kicks in)
  2. compute WAL at an 8% market rate (rates rise — prepayments floor at the base CPR, no incentive to refinance)
  3. compare: WAL at 4% ≈ 13.97 years, WAL at 8% ≈ 14.98 years — which direction is "extension," and why does that hurt a holder who was counting on the pool paying down faster?

Extend

A plain option-free bond of similar duration would see its effective duration shorten as rates rise (less time value left) — MBS extension is the opposite. Read reference/fixed_income/mbs_convexity.md's "What's demonstrable here, and what isn't" section, then explain in your own words why this WAL shift is a correct, verifiable result even though full negative- convexity price behavior isn't modeled here.