With a flattening yield curve on the horizon, MBS market participants are readjusting their expectations for returns. This is particularly true because investors have become used to passthroughs trading in a steepening yield curve scenario, as was the case for a large part of the last three years, said analysts.

"One of the bigger risks we see to relative value trades in the market is from increased curve volatility," wrote Lehman Brothers in a recent report.

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