Two key trades: long the basis and sell the 6.5/6 swap. Maintain long position in the basis but adjust hedge ratios and switch to a long position in FNMA 5s. Added the 6.5/6 swap at even dollar amounts. This is nominally short the market, but the swap is unlikely to compress in a continued rally (as it is already at a historically narrow level). In fact, analysts would not be surprised to see the 6.5/6 swap actually outperform in a further rally as the 6 roll is likely to weaken (if 6s continue appreciating). This trade is similar to just being short the FNMA 6 butterfly. The main difference is that some carry is sacrificed in favor of better convexity
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