For the past few weeks, activity in mortgages has been below average with better selling as a result of the market uncertainty regarding future Federal Reserve action. Last week finally brought investors out on the additional clarity provided by the inflation data and Chairman Ben Bernanke's semiannual report to Congress. Flows started to pick up beginning Monday with pockets of buying noted as certain investors anticipated that mortgages would benefit from a downtick in volatility following the inflation data. In addition, there was expectation that many real money investors intended on putting money to work after Bernanke spoke.
Expectations of better mortgage performance following Bernanke's report were realized on Wednesday when a broad range of real and fast money began piling into mortgages as the market rallied sharply on the prospect that an end was nearing to the Federal Reserve rate hikes. Particularly noteworthy was some buying from Asian investors, which has been largely absent for the last several months. Servicers were also active, initially moving up in coupon, but as the rally strengthened, they reversed course and started adding duration.