The debate on MBS supply going forward heated up last week, following the dramatic change in market conditions.

Lehman Brothers remains nervous about net issuance over the coming months. "The magnitude of the supply is a purchase market story and as such, should be less sensitive to interest rates," penned analysts at the firm last Monday. In an earlier publication, they had projected net issuance in mortgages to hit $200 billion to $250 billion a quarter going forward (see ASR 3/29). However, the economy appears to be "turning into a financing game," so the purchase market story will probably not hold as much weight given the recent backup in rates. Until this actually happens, however, Lehman still believes mortgage supply is going to be daunting in upcoming months.

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