In the updates is says something about when you have a full inventory the items replaced are the older items.

You get a button that spews up to ~400 items that didn't fit in the inventory, I don't remember if it is actually 400 or 300, but it's quite a lot.
Make sure to keep merging items to get gold and orange items and keep free space

Not sure if this is what you mean, but you can shuffle things around a bit - from my guide:

You can move items to the 3 different tabs by first shuffling them to the Transmutation grid, then selecting the tab, and then moving them from the transmutation grid onto that tab. I save the first tab for my legendaries + new drops, second tab for rares and 3rd tab for lower level items to combine.