Overweight current coupons, they look fairly priced, roll well, and the technicals remain strong; use any supply-induced cheapening to add more. Higher coupons look cheaper (than current coupons) but their duration is so short and carry so low they’re tough to overweight. The best mortgage trades enhance carry : dollar rolling, specified pools (favorable prepay characteristics), cheap 6.0% & 6.5% CMOs (which act as pass-through substitutes). Mortgages underperformed Treasuries, Agencies and corporates, but not by as much as expected. With current lack of duration and limited CMO product, long duration paper is trading fair-to-slightly rich. Look to other markets for duration.


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