With the recent flattening of the curve and drop in fixed mortgage rates, the firm looks for a major pickup in ARM prepayment speeds.They believe that investors looking to reinvest paydowns should consider moving into short PACs off the lowest possible collateral (30-year 5.0s, 15-year 4.5s). They argue that short PACs offer improved call protection and better returns in the current fast prepayment environment, as well as some protection from extension risk if rates back up sharply.They especially like short PACs off Ginnie 5.0s; the relatively slow turnover in Ginnie Maes should help the bonds retain their structural integrity.

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