In a report released this morning, UBS urged buysiders increase their overweight to mortgages from a slight overweight to a full overweight. Analysts said that they might even increase their position to a maximum overweight.

There are two major reasons for this shift, analysts said. The first is the strong employment number last Friday as well as the market backup that followed, which eased supply pressures. Analysts predict agency fixed-rate production of about $75 billion per month at these rate levels, which can be easily absorbed by the banks. At the pre-employment rate levels, the market was close to another refinancing wave. At this juncture, this is no longer a threat, UBS said. Aside from this, they expect that with the sell-off, bank purchases will increase significantly. Banks have a lot of cash that they were waiting for this backup to reinvest.

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