Hedge Funds Lead Buyers of Prepayment Derivatives

Hedge funds have stepped up as the first buyers of the new mortgage prepayment-based derivatives being offered twice monthly by Goldman Sachs.

Executives at Goldman Sachs told NMN that large mortgage servicers closely observed the first two sales and are also expected to join the market.

"We were very encouraged by the number of clients and the size of the orders that we got," said Bill Cassano, vice president, prepayment derivatives at Goldman.

"The servicers told us that they would watch a few auctions before they participate, but they have been very engaged," Mr. Cassano said.

Alan Brazil, managing director for mortgage and ABS research at the firm, also said the program has generated a lot of interest. He said participants in the market are using it to hedge roll positions and take views on prepayment speeds.

Right now, he said the market is focused on coupons in the 5.5% and 6.0% range, but he expects the coupons involved in the transactions to change as the market changes.

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