Trading in the mortgage-backed securities market this week was a tale about risk and reward.

Over the first two trading sessions of the holiday-shortened week, prices dropped and spreads widened sharply as investors repriced risk across the coupon stack. In the lower coupons, primarily 30-year 3.0s and 2.5s, it is increased supply; in credit-eligible 3.5s into 4.5s it is increased prepayment risk associated with historically low mortgage rates, while super premiums are faced with potential government initiatives to allow more credit-impaired borrowers to refinance, including through principal reduction, following President Barrack Obama's re-election.

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