Banks have been retreating from buying MBS at current yield levels, affecting CMO demand. Analysts predict that these financial institutions will soon be buying mortgage-backeds again, though CMO creation might wait a little before it catches on again.

In a recent UBS Warburg report, analysts said that, judging from discussions with banks, only a few were reinvesting their runoff in MBS. Meanwhile, many of these banks were outright sellers of MBS and/or holding a large share of their mortgage production in non-securitized form. UBS noted that, according to Federal Reserve numbers, holdings of MBS by large commercial banks plummeted to $317 billion (9/17/2003) from $389 billion (6/25/2003), which is a huge $72 billion plunge equivalent to 18.5% of total holdings.

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