This week set several new records: price highs on 30-year FNMA 3.0% through 4.0% coupons as well as lows on the 10-year note yield and 30-and 15-year fixed mortgage rates. 

Greece and the eurozone can take nearly all the credit for this as that ongoing drama kept the flight-to-safety bid fuelled. 

By Thursday's marks, FNMA 3.0s, 3.5s and 4.0s were at 102-05+, 104-21+ and 106-09, respectively; 10-year note yields were at 1.70%, and 30- and 15-year fixed rates were at 3.79% and 3.04%. 

The flight-to-quality took a very modest pause on Friday morning on the hype of Facebook's opening trade. However, it seems quite likely that new records are on the near horizon as there seems no end in sight yet on Europe righting itself. 

The steady increase in MBS prices over the week and increasing prepayment risk did not deter money managers, banks, REITs, hedge funds and other fast money which continued to buy down in coupon with 3.5s the favorite. 

The Federal Reserve, of course, was a regular purchaser in the lower half of the coupon stack at a daily average of $1.22 billion per day. This covered just over 50% of the supply over the period. All in all, buyers reportedly outnumbered sellers on most days by a ratio of 2 or 3 to 1. 

Investors were buoyed as well by the Federal Open Market Committee (FOMC) Minutes from the April 24-25 meeting.

Unlike the previous minutes of this year, there wasn't deterioration in support but an increase.

In fact "several members indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough," the FOMC minutes stated. 

This compares to "a couple of members" in the March meeting; "a few members" in the January meeting and "a number of members" in the December meeting.

Meanwhile, fuller coupons remained pressured as a result of a combination of selling on Home Affordable Refinane Program (HARP) 2.0 uncertainty and risk associated with the flatter yield curve and the recent Robert Menendez (D-NJ) and Barbara Boxer (D-CA) proposal, which is aimed at helping responsible and struggling homeowners refinance at lower rates.

By the latter part of the week, some stabilization was being seen in higher coupons.

There is potential for support returning as some analysts expect HARP-related speeds to peak in May. Adding to this possibility were remarks related to mortgage application activity from Michael Fratantoni, Mortgage Bankers Association vice president of research and economics.  He said that  survey participants indicated that  the 13% jump in the Refinance Index for the week ending May 11 was not a wholly a result of HARP volume. 

"The HARP share of refinances fell to 28% of refinance applications, down relative to last week and last month, when the share was just above 30% in April," Fratantoni said. 

Regarding the recent introduction by Menendez and Boxer of The Responsible Homeowner Refinancing Act of 2012, the possibility of the bill's passing is expected to be low at this time given the makeup of Congress.

Specifically, the concern in the bill has been the proposed extension for HARP eligibility to May 31, 2010 from May 31, 2009. Deutsche Bank Securities analysts believe that refinancing exposure would be modest and the impact concentrated mostly in 30-year 4.5% and 5.0% pools, a large portion of which is held by the Fed.

Mortgage banker selling picked up to about a $2.2 billion per day average from $1.9 billion last week. Supply consisted primarily of 3.5% with 3.0%s starting to pickup.

Originator pipelines are building and traders are warning of "heavy locks into the next sell-off".  A concern of this is that the potential supply avalanche could be difficult to absorb in a down trade. This could be possible as the amount of paydowns available for the Fed to reinvest in the current four-week period that ends June 12 totaled $25 billion, down from $29 billion.

The resulting weakness in MBS, though, should draw in yield buyers and others to take advantage of the supply-induced widening as technicals, carry, and prospects for the third round of quantitative easing remain favorable for MBS at this time.         

In other mortgage-related activity, 15s lagged 30s as the 2s10s curve flattened to +140 as of Thursday's close from +158 on Friday, May 11. GNMA/FNMAs were higher and benefited from the flight to safety bid as well as overseas buying. Specified trading activity was on the lighter side with continued demand for call protected paper.

The state of the world stimulated volume with Tradeweb reporting at a 110% average for the week versus 106% last week. Mortgages lagged Treasurys on the rally with Barclays MBS Index underperforming by 29 basis points over the week and bringing the month to -38 basis points in excess return to Treasurys.

The 30-year current coupon yield declined to 2.76% from 2.85% with the spread to 10-year notes at the wider end of its range at +103bps from +100.


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