Selling in discount mortgages by hedge funds and money managers by the end of last week picked up, as investors took advantage of the recent richening in the sector. However, prepayment fears and the apparent onset of a refinance boom sent ripples of fear into the mortgage market amid a week of down-in-coupon trading.

There was some nibbling in higher coupons as cheapening on prepayment fears has been overdone, though the prepayment risk deterred others into agencies, sources said. Near close last Thursday night, mortgage performance was mixed partially due to the flattening in the yield curve. Thirties underperformed by two ticks. Discounts, especially 7s, were the worst performing coupons last week, trailing premiums by one to three ticks. Fifteens were flat to slightly lower.

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