As REITs emerge as a key source of agency MBS demand and become the marginal buyers for mortgage-backeds, spreads are still range-bound even though there is the news that the Treasury is unwinding its MBS portfolio, according to Bank of America Merill Lynch analysts in a report released today.

In 2008, the Federal Reserve increased its balance sheet at a time when the rest of the financial industry was deleveraging. Given that financial markets have healed in the last two years and spreads have compressed, leverage is becoming key in boosting returns, analysts said.

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