Prepayment Risk Trend 2026

Prepayment risk arises when borrowers repay loans earlier than scheduled, trimming expected interest income. Lenders, especially mortgage-backed security investors, face reinvestment uncertainty. While borrowers benefit from refinancing savings, investors mitigate this exposure through prepayment penalties or structured tranches. Understanding this volatility helps optimize portfolio yield and cash-flow forecasting, making it vital for fixed-income risk management.