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RMBS Cash, Synthetic Spread Difference Grows

High leverage and rising interest rates are contributing to wider residential mortgage-backed securities spreads, but RMBS credit-default swap spreads are near all-time tights. Traders said the discrepancy between the cash and synthetic markets is growing and is being driven by hedge funds shorting RMBS protection.

"There is a huge conflict between fundamentals and technicals in the housing market," said Scott Eichel, senior managing director in ABS trading at Bear Stearns in New York. Average single-name BBB and BBB minus RMBS CDS traded last week at about 110 basis points and 195 bps, respectively--or five to 10 bps wide to cash--compared with both being about 130 bps and 180 bps last summer.


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