Recommends FNMA 5s and especially Dwarf 4.5s over 5s/10s agency debentures. FNMA 5s benefit from the special roll (about 5/32s a month better than funding) and the potential for a decline in volatility after the recent spike. While the front month OAS on FNMA 5s are at tight level, they have little meaning, in the firm's view, as the two month rolls are through fail. When/if FNMA 5s appear rich two months forward, then analysts will take their basis trade off. Being short the basis in this environment may be very costly, as the basis resets cheaper for July. There are simply not enough 30-year 5s to go around.

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