Mortgages continue to lag in May with month-to-date excess return through May 17 of -16 basis points, according to analysts at Lehman Brothers. This more than wipes out April's gain of 14 basis points. Year-to-date, however, excess return versus Treasurys is still a respectable 42 basis points.
The market tone was supportive in the first part of last week as recent weakness and a modest rally attracted strong buying from domestic accounts with interest ranging from 5s through 6.5s. The tone deteriorated on Wednesday following the stronger-than-expected CPI report that reduced the odds that the Federal Reserve would pause in June. The market sold off sharply and mortgages deteriorated on the uptick in volatility, emerging fears about extension risk, and some profit taking.