At current market levels, mortgages have hit what Deutsche Bank Securities analysts call an "inflection." In other words, further rallies will hurt MBS. At this point, analysts are mostly neutral on the mortgage sector with preference holding for current coupons.

The technical situation in the mortgage sector remains positive due to reinvestment of heavy paydowns and limited originator selling. Further support is expected to come from bank portfolios. According to Lehman Brothers, banks have been less active lately, but with prepayments and deposit growth, they expect banks "to come back with a vengeance."

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