As nearly the entire liquid 30-year market trading over par - while the 5.0% coupon doesn't trade at all - the mortgage backed securities market is concentrated in a very narrow range.

"Everything in the 6.5% coupon and above is set to prepay at close to 60 CPR, so most of the action in the market is in the 5.5% coupon and 6.0% coupon," said Art Frank, head of mortgage research at Nomura Securities International, Inc.

One development this year is there has been some concern about short squeezes in these two active coupons, said Frank. Last Wednesday, for instance, Frank noted that with 48-hour notification for 30-year Fannies and Freddies happening the following day, most of the rolls were fading to fair value.

However, Fannie 6s and Gold 5.5s were trading virtually at fail due to a short squeeze in those coupons. The problem in Gold 5.5s was the large demand from CMO underwriters, who needed much of the floating supply to back their already priced deals.

In research released last Wednesday, UBS Warburg analysts explained that with rates where they are (the market is now seeing the lowest rates in 41 years), the most "CMO-able" coupons are 30-year 5.5s and 15-year 5.0s. They stated that it becomes very hard to create CMOs when the collateral underlying them is priced above 102.

This is because dollar prices on the short bonds are much too high so they have to be stripped down. It is also difficult to create supports that provide enough yield across a wide array of scenarios. The dilemma, however, is that investors have cash to put to work now - and not to have to sit idle until November or December. The outcome of this is an "insatiable demand from CMB dealers for the limited supply of current coupon collateral,"they said.

UBS analysts stated that Fannie Mae and Freddie Mac have restricted the amount of CMOs that could get done in the current coupon 15-year and 30-year mortgages (which are 30-year 5.5s, 15-year 5.0s)

Other market observers stated that in this way, Fannie and Freddie are doing good by the market. "Given that the interest is all concentrated just in 30-year 5.5s and 15-year 5.0s, the GSEs do not want people doing so many deals that they can't get collateral for them," said a senior mortgage analyst. "Fannie and Freddie's actions ensure that when people price their deals, they will be able to obtain the collateral."

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