Given the current level of the Mortgage Bankers Association's Refinance Index - which is at its highest level in 18 months - combined with the elevated level of realized volatility (close to a 3-1/2 month high), investors should be looking for better convexity, analysts said.

In a report released recently, Deutsche Bank Securities analysts said that there are some implications for the mortgage sector arising from the combination of low rates and high refinancing volumes. One is that duration-neutral MBS portfolios will incur larger convexity-related whipsaw losses in a high realized volatility environment; and another one is that high refinance volumes suggest the fixed-rate pipeline and forward supply are building up at a robust pace.

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