MBS, especially those paying higher rates of interest than comparable Treasurys, are gaining an increased amount of attention from investors who have been sitting on cash.

Last week, traders seemed to have found their appetites for MBS despite fears about a sharp spike in refinancings.

As reported in National Mortgage News recently, prepayment speeds are relatively benign in relation to low mortgage rates. Roughly 25% of all outstanding mortgages are under water with a national delinquency rate of just under 10%.

Industry figures indicate that many mortgagors, although under water, are continuing to pay their loans — but also cannot refinance because they have no equity.

Meanwhile, it appears that MBS buyers are focusing on a need to invest cash and take advantage of the higher yields on MBS, be it Fannie Mae/Freddie Mac product or GNMAs.

Some market observers are calling this a capitulation, especially by domestic portfolio managers who shunned mortgage securities all year, complaining that prices were too high.

Now it is almost September, prices remain high and fund managers who put their money in other short-term investments, which are beginning to mature, are going back to mortgage bonds.

They say that, despite the prices, these bonds offer irresistible yields — about 150 basis points over comparable Treasurys. Dealers also recommend them to their customers.

"Not everybody is in love with this market," said Michael Graf, the head of U.S. short rates trading at Barclays Capital, "but they are not in love with the alternative, which is sitting on cash."

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