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By Richard Leong

NEW YORK, April 5 (Reuters) - U.S. mortgage bond prices
fell near three-month lows on Monday after Friday's sell-off,
spurred by fears that the Federal Reserve may be ready to hike
interest rates sooner than the market had thought likely.

After back-to-back days of declines, mortgage bonds wiped
out a big chunk of their year-to-date gains. Also, their yield
spreads versus Treasuries moved wider on Monday.

The sharp rise in Treasury yields, benchmarks for U.S.
mortgage rates, is negative for many holders of mortgage bonds
because higher rates tend to cool refinancing.

Slower refinancing means an increase in duration, or more
"extension" risks, for mortgage investors because they are
being paid back slower than expected and lose out on
reinvesting money at higher yields,

"The market has turned bearish again. People are looking
for extension protection," said Kevin Jackson, analyst at RBC
Dain Rauscher.

Fifteen and 30-year MBS were mostly 1/32 to 14/32 lower in
late Monday, finishing at their lowest levels since early
January. Bond equivalent yields on 30-year, 5-percent issues
were 10 basis points higher than late Friday.

Higher-coupon MBS fetched better bids than lower-coupon
issues because their prepayments tend to slow less as rates
rise, analysts said. Refinancing higher-coupon MBS are still
possible even with rising rates.

"People's prepayment expectations have changed," said David
Petrosinelli, portfolio manager at AMF Mutual Funds in Chicago,
which manages $5 billion in bonds. If the Treasury sell-off
continues, "lower-coupons will continue to underperform."

Still reeling from Friday's robust payrolls figures, the
yield on benchmark 10-year Treasury notes <US10YT=RR> was at
4.21 percent, up 30 basis points in two sessions.

On Friday, the U.S. Labor Department said domestic non-farm
payrolls added 308,000 jobs in March, nearly three times what
economists had forecast.

Prior to Friday's selloff, the mortgage market had enjoyed
healthy buying from banks, which want higher-yielding bonds
than Treasuries. But the upbeat employment report has at least
made buyers more cautious until yields stabilize.

Some analysts expect that bargain-hunters will emerge and
cushion the mortgage market from further losses.

For example, UBS analysts said in a research report on
Monday, "Banks have a lot of cash, and were waiting for this
back-up to reinvest."

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