Oas Models, Expected Returns, and a Steep Yield Curve

here is some conventional wisdom about today's term structure and how it applies to the mortgage-backed securities market: T The current term structure is, by historical standards, quite steep. Fixed-income options models assume that on average forward rates are realized. That is, the models currently imply a bearish term structure flattening. Furthermore, mortgage prepayments tend to decline as interest rates rise; the models therefore mume future prepayments will be declining. Thus the models are udurly prejudced against bullish securities such as principal-only strips and'inverse floaters. Conversely, the models are biased in favor of bearish securities such as interest-only strips and super-floaters.