With the refi wave in full throttle and a steepening yield curve fueling bank demand, CMO issuance is skyrocketing, sources said.

"If you look at gross CMO issuance and you compare it to gross changes in bank MBS holdings, you will see that the two are historically very closely correlated," said Michael McCarthy, an analyst at Merrill Lynch. "What it boils down to is if the banks are in buying [mode] then CMOs would be in demand."

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