With hybrid ARMs comprising a more considerable share of mortgage production compared to several months ago, analysts are now egging on investors to take advantage of this supply situation and to move into hybrid product for relative value.

Though in dollar-volume terms mortgage supply has gone down both on the fixed-rate side as well as on the hybrid end, the drop in the hybrid sector has been significantly less. This situation has caused widening in the sector's spreads seen in July and in early August. Although analysts say supply in the sector has dropped since then, causing nominal hybrid spreads to tighten about 20 to 25 basis points, OASs in hybrids are still approximately 25 basis points wider relative to fixed-rate paper - making it a decent relative value story, said analysts.

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