Mortgages turned in a fairly active week with participation from a wide range of investors - overseas, money managers, indexers, CMO desks, servicers and other fast money. A combination of further curve flattening, heavy supply in 5.5s, along with the market holding within its range, resulted in active down-in-coupon flows. Originator selling picked up last week and averaged over $1.5 billion per day with around 70% in 5.5s and the remainder in 5s.

Servicers were particularly active last week. In its mid-week commentary, JPMorgan Securities noted that the servicing community appears to have significantly increased its MBS exposure, attributing the rise in an attempt to hold earnings stable as origination volume slows. If so, this is a potential risk to mortgages causing JPMorgan to be near-term negative on the sector. Other reasons include marginal carry and limited spread tightening potential. Most other analysts, though, are neutral to slightly positive on the sector.

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