With bank demand not as aggressive compared to last year, analysts are questioning whether the carry trade could be as compelling as it had been in the past, and have concluded that bank demand for mortgages would probably not return to the lofty levels of 2003.

In a recent report, Lehman Brothers said that if Treasury yields settle in a range at current levels, the closest benchmark would be the first quarter of last year when 10-year Treasurys were trading at roughly 4%. During that period, the carry trade was the major theme in the mortgage market. Mortgages had a significant run as bank demand was considerable, said analysts. Additionally, the CMO machine was active and the TBA market offered near zero financing.

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