As the year draws to a close, a big concern for MBS investors is the likelihood that strong economic data might result in rapid Fed tightening - an event not expected to bode well for the mortgage sector. In this instance, mortgages will most likely suffer from high convexity costs in a sell-off, and banks are expected to de-lever as they shed MBS.
However, some market participants do not agree with this doomsday scenario. For instance, JPMorgan Securities' macro view is for a gradual Fed tightening, more like the 1997 experience than 1994. Analysts expect that the Fed would not repeat mistakes and compromise a shaky recovery; especially given that over 1% of GDP growth has recently been attributed to the housing market. Additionally, even if rates were to increase quickly, the widening in mortgages will most likely not resemble the events of July 2003, when a significant amount of duration-related selling happened.