DEFINITION of 'Portfolio Runoff'
A decrease in the assets of a mortgagebacked securities portfolio due to the prepayment of the securities held in that portfolio. It is risk these portfolios face, which can lead to prepayment risk and that usually forces the fund to reinvest the proceeds at lower yields than where the original securities were purchased.
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BREAKING DOWN 'Portfolio Runoff'
Most mortgagebacked securities have an embedded call option held by the borrowers of the underlying mortgages backing those securities. When interest rates fall or home values rise, an incentive is created for homeowners to refinance their mortgage, which leads to portfolio runoff for the investors in those mortgages.
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