Mortgage flows were active and two-way again last week. The week started off with good buying on a combination of paydown reinvestment and a Treasury market rally. There was better buying in both 30s and 15s from the real and fast money crowd, and overseas buyers made a modest appearance as well. Within the 30-year sector, 5s benefited from short covering; 5.5s saw two-way flows, while 6s were hit by selling to move down in coupon. Meanwhile, strong originator selling also weighed on 6s. By mid-week, however, the buying turned to selling as the market sold off with the weak five-year Treasury auction. Investors reversed earlier trades and were moving up into 6% coupons and Dwarf 5s. In early trading Thursday, spreads were tighter on light buying and limited originator selling. Most investors were awaiting the results of the 10-year Treasury auction - which went well. Expectations are that MBS buying will pick up as near-term sentiment improves.

Heading into this week, there is inflation data on Tuesday and Wednesday to get through. Other activities related to mortgages include the 48-hour notification beginning on Tuesday for 15-year MBS and on Thursday for 30-year GNMAs. Overall, mortgages remain sensitive to market direction. Stable to firm yields should attract buying in MBS, while a 4.70% 10-year Treasury yield could see another round of servicer selling.

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