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KBW: Prepayment speeds unlikely to rise over next 12-18 months

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Prepayment activity is unlikely to increase over the next year to 18 months, as long as mortgage rates hover around 5%, according to one financial services investment bank. Keefe, Bruyette & Woods said while mortgage rates remain low, they have increased meaningfully since the middle of November while refinance activity dropped sharply during this period. "We believe these trends support our view that the Agency MBS REITs can continue to generate attractive and stable dividends as the yield curve remains steep and amortization expense from prepayments trends down," KBW analysts said. Earlier in March, Fannie Mae, Freddie Mac and Ginnie Mae reported prepayments speeds slowed considerably in February. JPMorgan Chase (JPM) analysts agree with KBW regarding the rate and said "the steepening of the prepayment curve is now complete." Barclays Capital (BCS)  analysts believe uncertainties surrounding prepayment speeds have come down dramatically as most of the slowdown caused by the sell off over the past few months "should have materialized." Write to Jason Philyaw.

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