Although it's not going to be all smooth sailing in MBS land next year, things are expected to look up for the sector in the second half of 2006.

Countrywide Securities Senior Strategist Bill Berliner said that he is short-term neutral to bearish on MBS with the threat of an inverted yield curve in the first six months of 2006. He explained that under a flat or inverted yield curve scenario, increased funding costs push carry into negative territory, while OAS-based valuations also suffer. However, he is optimistic that after the first half, things should begin to look up for the sector especially with expected demand from non-traditional sources like Asia.

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