The Federal Reserve cutting discount rates last Friday helped mortgages record an impressive recovery. For example, prior to the Fed action, the Lehman Brothers MBS Index was down 69 basis points month-to-date through Aug. 16. By Friday's close, mortgages had recovered 32 basis points to close down 37 basis points so far for August. Given the turnaround and Fed action, Lehman considers whether investors should add mortgage exposure, particularly non-agency triple-As. While risks still remain, analysts suggested adding non-agency triple-As, but staying below a full overweight.

Non-agency triple-As are trading wider than the wides of 1998, Lehman analysts noted. In addition, compared to every other asset, triple-A non-agencies look very attractive from a spreads standpoint: 30 to 40 basis points pick in spread versus triple-B corporates and nearly 100 basis points versus agency TBAs.

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