The hybrid ARM sector looks very appealing, especially with the recent strong performance of the up-in-coupon trade, Street analysts say.

Before their inclusion in the Lehman Brothers Aggregate Index on April 1, hybrid ARMs had tightened on index demand, Deutsche Bank Securities analysts said in a recent report. However, these products lagged in the recent rally. Spreads are also nearing the wider levels seen in mid-March, Deutsche analysts said. Whole-loan hybrid ARM performance has also weakened recently following some tightening related to out-of-index buying by investors.

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