Outlook for relatively stable rates and declining implied volatilities over the intermediate term suggests a modest overweight stance in mortgages. Additionally, investor demand for high-yielding fixed-income investments with limited credit risk remains excellent, which should support mortgages. Within passthroughs, overweight current- and cusp-coupons. IO and cusp-coupon passthrough combinations offer even better projected return advantages and the potential to benefit from advantageous financing on the pass-throughs. TBAs still finance at very attractive levels.

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