With the recent volatility in interest rates - most apparent as the 10-year neared the 4.35% level - MBS performance has become subject to the direction of rates, said analysts. With falling rates, spreads are expected to be hit hard, while as rates rise, they will likely tighten. Currently, the market is anticipating higher rates.

"The temporary tangle between rates and mortgage performance argues for trimming mortgage portfolio exposure to volatility while minimizing any loss of carry," said Bear Stearns last Tuesday. "There are ways to that either in passthroughs, or in structure."

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