Mortgage activity picked up around midweek as a wide range of investors took advantage of the recent cheapening and generally benign economic news. Support strengthened further Thursday on month-end index buying, and squaring of positions ahead of last Friday's March employment report. At the same time, originator selling remained average at around $1 billion per day.
Analysts last week were mostly neutral to modestly overweight the sector. Lehman Brothers, which has been underweight for quite some time, turned neutral on mortgages. Analysts believe that with the "normalization" of rates, mortgages could benefit from the carry trade returning. Steady demand from banks, increased support from indexed accounts and lower selling risk from the GSEs are also supportive of mortgages. Regarding banks, analysts note that deposit growth remains high, while C&I lending remains a non-issue. With rates returning to more normal levels, Lehman also anticipates better demand from index accounts as they cover shorts.