It was an active week in mortgages last week as the 10-year Treasury pushed through 4% to the 3.90% level. There were several reasons for the strength in Treasurys including the setback for the EU on France's Constitutional rejection; the weaker than expected Chicago PMI; and the large lengthening in the Treasury Index. According to Lehman Brothers, the Treasury Index was set to extend 0.17 years last Wednesday, in large part due to the May refunding. This compares to an average May extension of 0.16 years and an average 12-month extension of 0.05 years.

The rally instigated strong down-in -coupon buying - especially into 5s - particularly from both real buyers and servicers. The move lower in coupon, however, was seeing a reversal from hedge funds on Thursday morning as Treasury prices were holding slightly lower after the release of revised first quarter productivity and costs that were stronger than expected. This left the market in somewhat of a holding pattern ahead of the May employment report due out last Friday.

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