For investors who expect mortgage rates to rise over 2010, Wells Fargo MBS analysts suggested structured products such as intermediate PACs and PAC IIs.
The investment helps maintain portfolio yield, they said and offers extension protection.
In their latest weekly research, they demonstrated this by using GNR 2010-7 LV, a PACII, compared to GNSF 5.0.
They pointed out there is a dollar take-out versus the collateral ($103-9 1/4 versus $103-26) with a similar risk/reward profile.
At the base case, the PACII offers 60 basis points additional spread and z-spread pick up of 86 basis points.
In a worse case scenario of a 300 basis points parallel shift in the yield curve, the average life extends 2.3-years on the structured bond versus 5.32-years on the passthrough.
Additionally, analysts said that across most interest rate scenarios, the PACII class outperformed the collateral on both a spread versus the curve and z-spread basis.