By the end of the year, LOAS for current-coupon agency MBS was down to zero, which is not a historical exception. In the absence of disturbing events, the MBS market often dives into zero or even sub-zero temperatures (see Levin [2001]). What was more striking is that high-premiums (7.5s and 8s) and low-discounts (4.5s) became traded virtually flat to swaps as well. In our view, this flat LOAS profile witnesses a complete ignorance of both refinancing risk and turnover risk. To illustrate this point, let us take a look at Exhibit 2 where we depict the history "risk-neutral" tunings of the AD&Co agency model (since March 19, 2004).

Exhibit 2

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