With the macroeconomic environment boding well for mortgages and with MBS technicals remaining solid, investors are entering the new year by approaching the sector with caution against skyrocketing prices.

"I expect that we are going to have a range-bound Treasury market with slightly higher rates leading to lower volatility, which is great for mortgages," said Pete Perrotti, senior vice president and director of MBS at Hartford Investment Management Co. "The problem with mortgages is pricing is pretty heavy, you have Fannie 5.5s trading at 102 4/32s for January settlement. With the prices in the mortgage market so high and with everything so refinanceable, the outlook for the mortgage market is cautious."

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