Last week's Fed cut has made mortgages more attractive, albeit in different degrees.

The Fed's action is good for mortgages only to the extent that "additional Fed easing might cause long-term rates to edge upward and as a result reduce prepayment speeds," said David Berson, vice president and chief economist at Fannie Mae.

Some were more enthusiastic, however. "I like mortgages right now," said Kathy Foody-Malus, vice president and senior portfolio manager at Federated Investors." With the Treasury market in what I believe to be a trading range with a bias towards slightly higher yield levels on Treasurys mortgages look like a solid investment."

Foody-Malus believes that mortgages are past the worst in terms of an acceleration in prepayment speeds. She said that to get any type of spike in refinancing activity, a commitment rate on 30-year fixed rate mortgages of about 6.8% is needed. The commitment rate as of the close last Tuesday was a 7.14%, a 34 basis point differential.

"That doesn't sound that far away, but it still is a decent chunk away if you consider where the yield on 10-year Treasurys would have to go to," she said "Keep in mind the overriding concern in the mortgage market has been prepayment fears. I firmly believe we are past that concern."

Buyers abound

Foody-Malus said that there is a lot of interest in mortgages coming from the banking sector.

"A natural buyer of mortgages are obviously the banks," she said. "Given the steep yield curve and the yield advantage pickup mortgages are a natural choice."

Art Frank, head of MBS research at Nomura Securities, said demand for mortgage product was coming from various sectors. Hedge funds, money managers and banks did some buying. There was also the possibility of increased CMO issuance.

Increased interest was seen from some investors in buying PACs that are five-years and longer. With the steep yield-curve, PACs roll down the Treasury curve in a way that enhance return much more than pass-throughs did.

Mortgage-banker selling remained steady. However, with recent higher 10-year yields, servicers were seen selling some 6s. The big mortgage banks previously bought a lot of 6s to use as a servicing hedge.

Last week, 6s were seen underperforming 6.5s and 7s. The coupon of choice for hedge funds has been 6.5.

The Fed cut positively affected spreads in the MBS market. According to Nomura's Frank, though spreads were volatile before the Fed easing, after the rate cut, they were settling in about five basis points tighter vs. ten-year Treasurys. Tightening spreads were also seen in other arenas: swaps tightened about four basis points and ten-year agencies were about three basis points tighter.

In the meantime, nobody knows what the next Fed move will be, though the Fed left the door open to another easing with their announcement last Tuesday.

"I think the Fed is going to have to see the economic data within the next six weeks," said Fannie Mae's Berson.

In the coming weeks, important economic data such as the employment report will be released.

"If the employment numbers continue to be negative," said Berson. "and if capital spending continues to be negative - and we'll see that with the manufactured goods orders - then the odds would be that the Fed would ease one more time."

However, he said that if we start to see strength in the numbers then the Fed may decide to hold off in order to see whether the turnaround is real.

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