China's announcement that it would adopt what a report from the U.S. Treasury termed "a more flexible exchange rate regime" has led to slight short-term shifts in the U.S. mortgage-backed securities market and may have implications for MBS demand over the long term.In the short term, the MBS-related effects of the move as of Thursday morning were a general tightening that RBS Greenwich Capital MBS strategist Alex Crawford characterized as a "knee-jerk reaction to the sell-off" (except for 30-year 5s, which were flat to 10-year U.S. Treasuries at deadline time) and a slight underperformance in Ginnie Maes, "as they have been perceived to be the darling bonds of Asia for the past six months." (The rate-indicative 10-year Treasury yield has been trending upward for some time. Thursday morning that rise accelerated, causing the yield to increase from about 4.20% to 4.27% at midday.) In the long term, Mr. Crawford said MBS overall demand may decrease very gradually, but also may diversify to the point when Chinese investors may even develop an interest in hybrid adjustable-rate mortgages.

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