/MBS: TD's Priya Misra, Gennadiy Goldberg...>

US TSYS: /MBS: TD's Priya Misra, Gennadiy Goldberg and Cheng Chen said that

"bank buying of MBS has picked up sharply in recent months. Upcoming FASB rule

changes might help further increase banks' propensity to own MBS as it provides

them with the flexibility to get hedge accounting and keep MBS in AFS books.

This can help offset some of the impact of the Fed's portfolio runoff on the

mortgage market."

- They "still believe that MBS spreads could widen in coming months, but the

magnitude of the widening move is likely to be smaller than we thought a few

months ago. Further, the correlation between swap spreads and MBS spreads is

likely to strengthen going forward, even as it will likely remain weaker than

before the crisis since banks will not at all be as active hedgers as the GSEs

were pre-crisis."