hard · Asset-Backed Securities
A CMBS IO strip is considered 'rate-insensitive' compared to a residential MBS IO strip. Why?
- Commercial properties generate more income when interest rates rise, offsetting price declines.
- The CMBS IO strip coupon is floating-rate and matches SOFR movements.
- Rating agencies mandate that CMBS IOs be hedged with interest rate swaps by the issuer.
- CMBS loans have prepayment protection (lockout, yield maintenance, or defeasance) that prevents rapid pool balance declines when rates fall.
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