week 41..happy holidays and .. Mortgage backs

In anticipation of the asset backed class next quarter, i found this WSJ article informative. Here are the key issues:
Next year, some of the same forces that helped mortgage bonds do well in 2006 -- low volatility, continued buying from banks and overseas investors -- are expected to remain in place. Mortgage bonds are expected to perform well, though it will be harder for the market to log the same amount of excess returns over Treasurys.

If the 10-year Treasury yield -- the baseline from which mortgage rates are priced -- were to drop toward 4%, "you have mortgage rates low enough to entice more refinancing into the system," says Scott Kirby, portfolio manager for RiverSource Investments in Minneapolis.

Refinancing is bad for mortgage bondholders as their bonds get redeemed early, leaving them with funds to invest in a falling interest-rate environment.

In that case, volatility would likely pick up as mortgage-bond investors scramble to adjust their hedging strategies by buying options.