Most market players were taken aback by how badly mortgages fared during the first few trading days of last week, and the dim outlook for mortgage-backed securities continued through the week's end amid major spread widening and a dearth of buyers looking for paper.

"The technicals for mortgages are so very negative now, even though the fundamentals are pretty good," said Art Frank, head of mortgage research at Nomura Securities. "We widened out to 170 basis points over, and we've now widened 49 basis points since the middle of May."

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