Barclays Capital analysts last week suggested that investors look at loan balance discount paper. The pay-ups are currently very low, and analysts believe the sector can provide better extension protection versus the generic discount universe.
Why the focus on lowering extension risk? Cash-out refis have boosted speeds for generic discounts. However, analysts said that as the housing market slows and mortgage rates continue to rise, cash-out refinancings are expected to decline, causing generic discounts to slow more than loan balance MBS.