With the recent rally taking mortgage rates just beneath 5.60% - considered by some analysts as a critical level for refinancing exposure - there is a renewed discussion in the market place about refinancing risk, particularly with the Freddie Mac 30-year fixed rate dropping to 5.57% last week.

Credit Suisse First Boston Mortgage Strategist Mahesh Swaminathan said that current refinance exposure of the mortgage market as a whole is contained with only about 33% exposed to at least a 50 basis points refi incentive, while 30-year 5.5s (the largest coupon outstanding) now only have a 13% exposure. Swaminathan reported that a critical point prompting a jump in convexity buying would be if 5.5s gain a refinance exposure of above 50%. He also said that a 15 basis points rally from the current 5.57% level on the 30-year mortgage rate would bring 61% of the 5.5 universe into the refinance window, while a 20 basis point rally would result in 84% of 5.5s being exposed. Conversely, extension risk - which brings about convexity related selling - is also currently contained with only minimal drops in refinance exposure expected. Swaminathan said that any extension is likely to be localized at this point.

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