The firm recommends selling 15-year 5.0% passthroughs and buying a duration-weighted quantity of 15-year 4.5% passthroughs. 15-year 5.0% have been a very strong performer in recent weeks, driven by strong demand for CMO collateral and outright buying by depositories. As a result, the firm believes that the coupon is rich relative to 15-year 4.5%. In addition, the 5.0%'s combination of high dollar price and relatively low yield spread to swaps is likely to make CMO issuance more difficult in that coupon, which would remove a key source of demand for 5.0% and likely cause the 5.0% / 4.5% relationship to move back toward fair value.
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