medium · Asset-Backed Securities asset-nuances
A CMBS IO strip is considered 'rate-insensitive' compared to a residential MBS IO strip. Why?
- Commercial properties tend to generate materially more net operating income as rates rise, offsetting price declines in the strip.
- The CMBS IO strip's coupon is structured as a floating rate instrument that automatically resets in tandem with SOFR movements each period.
- Rating agencies formally mandate that all issuers must hedge every CMBS IO strip with interest rate swaps before the securitization deal can close.
- CMBS loans have prepayment protection (lockout, yield maintenance, or defeasance) that prevents rapid pool balance declines when rates fall.
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