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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (77921)1/21/2007 6:39:03 AM
From: Crimson Ghost   of 110194
 

Boost Exposure to U.S. Mortgage-Backed Securities
Range-bound yields should provide some upside for U.S. MBS.

The probability of a Fed rate cut in the first half of 2007 has tumbled as retail sales surprised on the upside and investors upgraded their growth expectations. Treasury yields are back in the middle of a trading range and unlikely to test either end in the near run. This drop in volatility provides a green light to assume more convexity risk in the bond market. Specifically, MBS and callable agency bonds tend to outperform when volatility is low or declining. Moreover, the mortgage index is reasonably attractive; the option-adjusted spread of the fixed MBS index has widened to about 40 basis points, its highest level since mid-November. Bottom Line: Our U.S. Bond Strategy service recommends upgrading MBS to overweight at the expense of Treasury securities.

Bank Credit Analyst
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