Mortgages are off to a strong start in August. For the month through Aug. 7, the Lehman Brothers MBS Index outperformed Treasurys by 30 basis points. In fact, MBS is outperforming ABS (six basis points over), CMBS (negative 40 basis points) as well as corporates (negative three basis points).

The improved performance came on a break in the flight to quality that allowed volatility to decline and swap spreads to tighten. This encouraged active buying from real-money investors that was focused primarily in 5.5% and 6% coupons. Originator selling averaged more than $1.5 billion per day, with supply largely in 6s and to a lesser extent in 6.5s.

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