A principal-only (PO) mortgage pass-through strip security is attractive to investors that wish to increase the interest rate sensitivity of their portfolio.

Question

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A principal-only (PO) mortgage pass-through strip security is stripped of its interest payments, meaning that the investor only receives the principal payments from the underlying mortgages. As interest rates rise, the mortgages in the pool are paid down faster, increasing the principal payments received by the investor. Therefore, a PO security is more sensitive to changes in interest rates than a regular mortgage-backed security, making it attractive to investors looking to increase interest rate sensitivity in their portfolio.

A Principal-Only (PO) Mortgage Pass-Through Strip Security Is Attractive to Investors