Market flows were light and went in both directions as last week got started, while many participants held out for the Federal Open Market Committee's statement on Wednesday. The tone in the mortgage-backed sector, however, was supportive with overseas investors, hedge funds, money managers and servicers buying in 5s and 6s, both outright and against Treasurys and swaps. Specified pools were also seeing interest, particularly from money managers focused in the 5s and 5.5s, while fixed 10/20 paper was getting bids from CMO desks and real money.
Flows were picking up Tuesday as data raised the possibility that the Federal Reserve would cut its rate next time by only 25 basis points, instead of by the 50 basis points the market had been expecting. Following the better-than-expected durable goods news, fed funds futures put odds of a 50-basis-point cut at 76%, versus 84% ahead of the report. As of midday last Tuesday, Treasurys were selling off, with the strong data as well as the Fed's and government's actions suggesting that a recession was less likely. The 10-year Treasury yield was at 3.694% compared with 3.584% as of the previous Friday's close. Mortgages initially were tighter on real- and fast-money buying as well as because of overseas investor interest. However, these had weakened by midday as supply and profit-taking picked up.