Mortgages saw decent volume in the first half of last week as the Federal Reserve dominated the market's attention. Flows Monday were mixed with heavy selling in the morning. This moved spreads substantially wider, which then drew in buyers in the afternoon. Specifically, originators sold about $2.5 billion in 5.5s and 6s, while servicers were actively moving up in coupon - to the tune of $4 billion, according to sources. The weight of the supply sent spreads wider to swaps by five to six ticks, attracting real money and leveraged buying in the afternoon and decent overnight buying.

The Monday afternoon support carried over into Tuesday's pre-Federal Open Market Committee session with active buying noted from money managers, leveraged investors and servicers - this time moving down in coupon from 6s to 5s. Prior to the Fed's afternoon statement, buyers were outnumbering sellers. After the Fed's disappointing action - just 25 basis points cut in the Fed Funds rate, 25 basis points in the discount rate and no certainty on the bias - spreads surged wider with money managers taking profits as Treasury prices jumped. Specifically, the 10-year Treasury yield fell to 3.99% from 4.149% as of Monday's close.

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