With extension risk now an issue in the MBS market, the hybrid ARM sector is once again in the spotlight. Not only are ARMs a defense against extension, the sector also provides shelter from increased market volatility. And although agency fixed-rate MBS spreads have been widening, hybrid spreads have remained firm, JPMorgan Securities analysts said.

Furthermore, Deutsche Bank Securities analysts said that ARMs currently look cheap to 15-year fixed-rate MBS as well as other duration products on an OAS basis. A decline in traditional hybrid ARM supply in favor of option ARMs and fixed-rate MBS should favor the sector too, Deutsche analysts added.

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