Mortgages got relief last week as rates moved away from 4.40% on the 10-year Treasury as a result of a stronger than expected ISM Services Index Tuesday and a strong ADP National Employment report on Wednesday that raised concerns about last Friday's employment report. The ISM Services Index rose to 58.9, which is the highest it's been since May. Consensus had forecasted a decline from the previous report. The ADP report calls for total private nonfarm employment to have risen by 158,000 in November. The median estimate has nonfarm payrolls increasing just 110,000 in November with upward revisions for October. At Wednesday's close, the 10-year yield was 4.480% compared to 4.427% as of Friday, Dec.1.

The first half of the week saw active buying in heavy volume with flows moving up in coupon into 5.5s through 6.5s. Flows out of discounts into higher coupons were estimated at $5 billion to $7 billion. Both real and fast money were participating in this trade. Asian buying was also a steady buyer throughout most of the week. Interest was focused primarily in the higher coupons as they've lagged in the recent rally. Also encouraging interest is the curve steepening and possibly year-end window dressing needs. Originator selling averaged its normal $1 billion per day, down from around $1.5 billion last week.

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