Investors are facing both increased extension and call risk at the moment. For these buyers, Barclays Capital suggested stripped down 10/20 IOs because they allow the creation of lower priced bonds, which helps fight premium erosion. Meanwhile, the higher WAC protects against extension risk.

Additionally, 10/20 IO collateral has exhibited call protection as the underlying borrowers are sensitive to their monthly payments and extension protection through increased delinquency buyouts.

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