For investors who want to take a view on the housing market, Bear Stearns analysts have suggested moving into new 5.5% Trust IOs. These bonds are the most leveraged instruments to the housing market that are currently available in the agency MBS universe, they noted. In addition, there is decent size, good liquidity, no credit risk, and the investor can earn positive carry while waiting for the housing story to play out.

Because new Trust IOs derive their cash flows from recently originated loans with note rates that are below current 30-year mortgage rates, they are less sensitive to interest rate fluctuations like IOs with current or above market coupons, and so should track the direction of the housing market, analysts said. Therefore, if home price appreciation continues to slow, it will take longer for borrowers to do cash-out refinancings.

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