Recent selling has pushed many non-agency MBS yields, particularly in subprime and option ARM, to acceptable and even attractive levels, a recent Merill Lynch report said.

Analysts said that despite the poor outlook for U.S. housing, fairly conservative scenario assumptions could still offer reasonably attractive yield profiles.

The firm said that, considering market technicals, investors should stay cautious when approaching the sector because further price deterioration is still possible.

In the report, analysts looked at collateral performance and present bond yield profiles utilizing current prices. Both sectors are performing poorly and are roughly the most comparable within the non-agency market. Running them under the same set of scenarios offers a generic and transparent setting for comparison, according to analysts.

They also present additional risk-valuation metrics for use to discern bond suitability, adding that  investors should look beyond yield profiles when selecting bonds. Yield profiles offer important information but do not fully reveal the risks that are associated with a bond. Analysts in the report examined additional risk measures that should be considered.

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