MBS volume was running below normal through the middle of last week as a result of mixed flows. A strong early rally on Tuesday, along with weaker rolls, led to MBS selling by money managers and banks. However, the substantial widening was mostly recovered by the end of the day as fast and real money took advantage of the cheapening. Overseas investors were mixed early in the week, with some buying limited by a series of Asian holidays. One sector that saw increased interest was specified pools, particularly 5s and 5.5s.
Better interest in MBS was anticipated on month-end buying, especially from overseas, toward the end of the week. Lehman Brothers expects the MBS Index to lengthen 0.06 years, which is substantially lower than the September average, but this still translates to a month-over-month increase of 0.02 years in overall duration, to 3.81 years. Meanwhile, the Aggregate Index is forecast to extend 0.08 years, primarily due to a 0.12-year move out in the Agency Index.