With Ginnie Maes looking rich to conventionals overall, investors should underweight the sector, said analysts from Deutsche Bank in a recent report.

However, the underweight recommendation somewhat clashes with the firm's concern about higher volatility and/or swap spreads; however, analysts said that implied volatility and swap spreads are negatively correlated at these rate levels. This is particularly the case as rates increase (by about more than 50 basis points); swap spreads will likely widen as mortgage hedgers start lengthening the duration of their hedges. At the same time, an increase in rates will most likely be accompanied by a more apparent economic recovery as well as a corresponding decrease in uncertainty and volatility.

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