Most market players were not taken aback by the Federal Reserve's decision to change its bias toward the tightening of monetary policy, and most participants agreed that the mortgage market was not directly affected.

"I don't think it impacted mortgages so much as the market in general," said an MBS trader. "People are just very confused right now by the FOMC's statements. There is an ongoing debate about what they really mean. One of the major tenets of interpersonal communication is that information is not communication. Well, the Fed came out with information, but what do they really mean?"

"It is totally inconsistent for the [FOMC] to talk about improving liquidity towards year-end, and at the same time express a bias towards tightening," added another trader. "They want to see higher rates without having to tighten, and they will play this game until year-end."

Most observers seemed to express an air of caution in the market last week, mainly because the economy may lead the Fed to raise interest rates for a third time this year in order to stop any possibilities of inflation. The Fed meets again on Nov. 16 and Dec. 21.

The general theme in the market last week, however, was that issuance seemed to be very much off, although the technical situation for mortgages seems to have improved.

Several sources mentioned that the market was "trading off," but originators were not coming into the market, which is what usually happens. Since originator pipelines are now fairly tight, Wall Street observers will not see such massive origination every time the market gets slower.

"Mortgages have reverted to their fairly normal pattern of widening into rallies and tightening into sell-offs," said one MBS portfolio manager. "There is no huge supply overhang and there is decent buying interest, so I am fairly positive on mortgages now."

As far as relative value is concerned, one source said that the best thing going "is the fact that you can buy Gold 8's in November and December at between three percent and four percent cost-of-fund."

At the end of last week, the current coupon Fannie Mae tightened two basis points to 154 basis points. This represents an 11 basis point tightening compared to the start of the month, sources said.

Otherwise, coupon spreads seemed to be "pretty much in line," and one MBS trader commented that "nothing looks exceptionally cheap or rich."

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