The bottom line, said Deutsche Bank Securities analysts, is that "[Federal Reserve] demand is the only factor keeping mortgages at this very rich level." How rich? They calculated FNMA 30-year 4% MBS has an OAS of around negative16 basis points to both swaps and Treasurys, Libor ZV of 67 basis points and Treasury ZV of 60 basis points.

Given the government support, analysts acknowledged that it is difficult to short mortgages, particularly if the market sells off. At the same time, they did not suggest investors that currently hold current coupons should be in any immediate rush to sell as the Fed currently is on a pace to buy through year-end. However, investors should be aware of the risks to valuations and rolls as the Fed nears its $1.25 trillion mark, analysts said, and "use the interim time to slowly lighten up their positions."

Deutsche also suggested that new investors consider other asset classes such as agency debentures or supranational bank issuance. In addition, they caution the Term ABS Loan Facility program for legacy assets, which appears to provide significant returns, could lead to a shift out of mortgages and affect valuations in the short run.

As such, they suggest current investors consider taking profits on further tightening.

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