The ScanRate Danish Mortgage Backed Securities (DMBS) service published on Thomson-Reuters has undergone several improvements which will be released on November 10th 2008.[1] The enhancements will be shortly described in the following. For more information on a particular issue please do not hesitate to contact the ScanRate DMBS team at dmbssupport@scanrate.dk.
The changes have been announced on the Reuters DMBSINFO page and the DMBS120 page shows a comparison of key figures between the old and the new model.
Increased Stability of Swap Yield Curve
The swap yield curve used in the calculation of key figures has been significantly improved. We have decided to base the short end of the yield curve on the overnight index swap (OIS) rates plus the spread between CIBOR and the OIS rate calculated at the latest CIBOR fixing. The use of CIBOR implies improved prediction of future coupon fixings and hence stable key figures across fixing dates for capped floaters. The improvement for capped floaters is achieved with only marginal effect on key measures for fixed rate mortgage bonds. The use of OIS rates captures the dynamics of the development in short end rates between the daily CIBOR fixings.
The snap time of the end-of-day yield curves has been changed to 3:15 pm based on an analysis of intra-day bid-ask spreads and liquidity.
Improved Prepayment Model
Previously the DMBS refinancing gains were calculated relative to the swap curve and the prepayment estimates have so far failed to incorporate the recent sharp increase in the refinancing spread i.e. the difference between swap rates and the yield for open mortgage bond series. This has resulted in unrealistic high prepayment estimates for the new 6 ’41 and 7 ’41 series.
The new DMBS model incorporates a mean reverting refinancing spread using the assumption that the current refinancing spread will revert towards a long term average spread.
The mean reverting refinancing spread currently affects the 6% and 7% coupon segments for which prepayment estimates are adjusted to more reasonable levels. The 4 and 5 percent bonds are almost unaffected by this modification of the pricing model.
The update of the prepayment model also includes a simplified forecast model for the next prepayment rate as well as an improved definition of the burnout indicator.
Hourly updates of the total DMBS Sample
So far the bonds included in the DMBS service have been recalculated at 8:45 in the morning as well as 5:30 in the afternoon. Additional calculations are published whenever we receive new information on preliminary redemptions. With the DMBS release 2008 we calculate all bonds once an hour during day time. That is, we provide users of the DMBS service with hourly updated option adjusted key measures for around 500 Danish mortgage backed bonds including capped floaters.
The DMBS 2008 release does not affect the calculation of the list of market maker bonds (0#DKMTG=DMBS) which continues to be updated with an 8 minutes interval.
Assumptions on Debtor Distributions for Newly Issued Series
With the DMBS release 2008 we include newly issued bonds as soon as they enter the market. Previously we had to wait for the first publication of debtor information which could results in a 1-2 month delay. In the calculation of new issues we apply the assumption that the debtor composition of a newly opened bond series is similar to a weighted average of the current market. Our analyses indicate that the average chosen is a good approximation of the actual composition of debtors in a newly opened series. Immediately after the first publication of actual debtor information on a new series we switch to actual data.
[1] The changes are based on a original research done by ScanRate modeling team and the full research reports have been published as part of the ScanRate Prepayment and Valuation (SPV) service.