The process of separating the principal and interest on a debt obligation is known as stripping. A mortgage-backed security (MBS) that goes through this processseparating the interest and principal payment streamsis referred to as stripped MBS. Since the underlying assets in an MBS are mortgages, the interest only(IO) strip functions like the interest payment portion of a mortgage. The other half of the stripped securitythe portion that is not the interest only stripis known as a principal only (PO) strip. Investors who buy principal only strips receive the portion of the monthly payment from the underlying mortgage pool that is applied to the balance of the loan.

Given the prepayment pattern of the Agency fixed-rate MBS follows the S-Curve pattern, i.e., sensitive to market interest rates, the future cashflows and valuation of an IO strip depend on the interest rate levels. The higher market mortgage rates, the slower projected prepayment speeds, and longer interest cashflows and higher valuation. Vice versa. For such cashflow and valuation pattern, what is the sign of the duration of an IO strip? Why?