Flows last week were dictated by the economic data and the curve reaction, particularly in relation to the favorable inflation report. The week started off quietly with some profit-taking noted from hedge funds and money managers. On Tuesday, the market took off, with strong buying from a variety of accounts in lower coupons as the market rallied on the better-than-expected CPI report. Wednesday, the up-in-coupon trade was preferred, with investors taking profits in lower coupons following the strong gains from the previous session as the market sold off.
In comments, JPMorgan Securities said it was myopic to go up-in-coupon solely based on the short-term carry ahead of a Fed rate increase. JPMorgan maintains a down-in-coupon bias and favors 30-year discounts over 15s. This is due in part to expectations that turnover activity will be higher than expected. As the week closed out, flows were light, but two-way. Originator selling averaged about $1 billion per day last week, with supply consisting primarily of 5.5% and 6.0% coupons.