When spreads narrow for all of the spread product sectors...

CFA Level III
#1

we should underweight the treasury sector and overweight the Mortgage, Asset-based and CMBS sector.

I get that we should underweight the treasury sector because treasury sector performs well when spread widens. I get that CMBS kinda works the opposite way with Treasury…but what is the explaination for overweighting in mortgage asset based and CMBS sector? MBS has negative convexity which limites the profitability when rates decline (from the narrowing of spread), no?

Or the narrowing of spread simply means default rate, not interest rate, drops?

#2

Basically,

Spreads narrow, less risk, you’ll go fetch higher yield, where you can, taking on more risk.

Concavity will limit the appreciation of securities on lowering IRs but Treasuries are usually taken as RiskfreeRate… the lower yield available, you’ll still be over that yield with your MBS.