Last week was all about Treasurys and equities. The yield on the 10-year Treasury dropped below 4% and is at levels not seen since the days of Camelot. Further support for Treasurys came from mortgage participants adding duration or hedging their portfolios. Over the Wednesday-to-Wednesday period, spreads on 30-year Fannie Mae 6s through 7s moved out eight basis points, and 7.5s and 8s widened by 17 and 23 basis points, respectively. The 15-year sector was hit hard as well with spreads 16 basis points weaker for 5.5s through 6.5s.
Flows were mixed as heavy originator selling has yet to materialize and selling averaged about $1 billion per day. The selling, however, was primarily in 5.5s and 6s. According to Lehman Brothers, originators have become more confident in selling 5.5% coupons over the past few days. As a result, liquidity in that coupon may start to improve. Overall investor flows for the week favored selling versus buying. Selling of mortgages to move into Treasurys was noted, and what buying took place focused on 15-year 5s and 30-year 5.5s.