Bank of America Merrill Lynch points out that short PACs off premium 10/20s offer very attractive yield profiles currently. This is the result of concerns regarding the potential for higher prepayment speeds in 10/20 collateral through buyouts and loan modifications.

In an example, they note that 3-year 4% PACs off 6.5% coupon 10/20 collateral offer yields of 3.36% to 3.42% in their base case scenario that assumes a 30 CPR. This equates to +175bps over the Treasury curve.

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