As refinancings recede, Wall Street is warming to mortgage-backed securities.

Since the beginning of January, mortgage yields have moved 19 basis points closer to those on the 10-year Treasury note, indicating a return in investor confidence.

The mortgage-backed securities market is "more fair-valued than cheap," said Arthur Q. Frank, director of fixed-income research at Nomura Securities International. At the close of the bond market Thursday, the current-coupon conventional mortgage was 147 basis points over the 10-year Treasury, he said.

With this tightening, investors need to look for value, Mr. Frank said. He recommended seasoned, Ginnie Mae, fully indexed adjustable-rate mortgages. For these securities, "the refinancing wave is really now over," he said.

One trader on Wall Street said that both mortgage supply and prepayment waves "seem behind us" and as a result her client base is open to buying mortgage-backeds.

But investors remain somewhat wary about the direction of interest rates and are taking a cautious approach.

"We're at the bottom end of a recent price range on Treasuries, and as a result there really is some uncertainty" whether higher interest rates will set in, said Rich Schwartz, a portfolio manager for New York Life Asset Management in Parsippany, N.J.

"A further rise in rates might cause a concern about mortgages extending their durations," he said. This would lead investors to sell mortgages in their portfolios..

Even with prepayment fears diminishing and mortgages performing well, Mr. Schwartz said he is neutral on mortgages.

With the uptick in mortgage interest rates during the last two to three months, prepayment speeds-the rate at which homeowners prepay their mortgages through a refinancing or the sale of a house-have slowed somewhat, said Jon E. Korpela, senior vice president for the secondary market at Banknorth Mortgage Co. in Brattleboro, Vt.

Spreads have gone down since January because investors are willing to pay more for the security in exchange for lower prepayment risk, he said.

Investors are still working to reassess their positions since last fall, when dramatic spread-widening and liquidity constraints caught many by surprise, said Peter L. Struck, first vice president and manager of the treasury division at Washington Mutual Inc. in Seattle.

"The market has returned to a semblance of some balance," he said. "Spreads are still wider than they were last summer, but there is some level of liquidity returning to the market."

But with the Fed "on hold," Mr. Struck said, it is unlikely that the market will see another refinancing boom on the "near-term horizon." So investors, he said, have to "pick and choose their spots."

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