With a curve flattening on the horizon, the MBS market is gearing up for a potential shift in bank demand. A large liquidation of bank portfolios would cause a significant cheapening of mortgages. On the other hand, if bank demand remains strong, analysts forecast a considerable tightening of mortgage spreads from current levels, as the sector now appears cheap.
Street analysts have diverging views on the issue. Some predict a heavy liquidation of bank mortgage portfolios while others expect aggressive buying of mortgages because of the lack of demand for C&I loans.