U.S. Treasury buysiders may be looking to the MBS market as interest rates continue to rise, researchers at Bear Stearns stated in a report today. Analysts noted blocks of passthroughs currently trading below par for the first time in over a year, and this type of pricing has removed the underlying mortgages from the refinancing radar. Bear said that structured MBS backed by these cash flows appear to be manageable alternatives to Treasurys. They suggested a couple of trades: three-year or shorter PACs vs. Treasurys and five-year PACs vs. Treasurys.

Bear noted that in the last two weeks almost $97 billion in 30-year passthroughs, specifically 5s, have lost their simplest refinancing incentive. Meanwhile, another $516 billion in 30-year 5.5s is on the brink of sinking below par. With 30-year mortgage rates now over 6.20%, the borrowers behind these loans have seen cash out and cheaper monthly payment incentives disappear.

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