JPMorgan (JPM) recommends remaining overweight in MBS because investors are being "well compensated" for prepayment uncertainty. The MBS market rallied last week as wider spreads drew in banks and money managers, JPMorgan analysts said in their weekly securitized products note. Although the Federal Reserve continues to buy Treasury debt with proceeds from maturing MBS rather than more of the same securities, “the potential to buy more MBS is there, but clearly will be a less likely scenario than other options in the near-term,” according to JPMorgan analysts. The Fed’s action is designed to push yields lower on mortgages, agencies and Treasuries, while driving investors into riskier asset classes with the least amount market disruption as possible, the analysts said. Today, the Federal Reserve Bank of New York bought another $360 million of Treasury Inflation Protected Securities, or TIPS. “Many investors question why the Fed would consider increasing [quantitative easing] now that 10-year Treasury yields are at 2.65% and 2-year notes hover around 55 bp. The answer is that QE injects more cash into the system, and continues to drive yields on high credit quality assets lower, pushing investors into other asset classes,” JPMorgan analysts said. The Fed’s portfolio includes about $1.1 trillion of MBS, and its long-term objective is one predominantly made up of Treasuries not mortgages, so paydowns are the “only realistic exit strategy” to achieve this objective, according to the analysts. Write to Jason Philyaw.