underweight mbs? why?
MBS exhibit negative convexity when rates drop (due to pre-payments), so if spreads are dropping, MBS prices will not increase in price as much as other stuff.
It is exactly what i think. however, the answer provided by cfi is B => . to overweight MB
ifaster i’m confused as well, this is an earlier post i found but answers were unresolved but maybe it helps you? http://www.analystforum.com/phorums/read.php?13,738933,740869#msg-740869
The question asks you to choose the best strategy given the yield spread forecast, which is that all spreads will narrow. Since MBS is a spread product, you would want to be long these vs. short treasuries when the spread narrows.