It was a record breaking week in terms of the 10-year note yield, lower coupon MBS prices and mortgage rates.

The week came, however, with increasing risks related to Greece potentially exiting the eurozone and Spanish banks needing a hefty bailout. This is in addition to the poor data that came out of the U.S. and China, which also raised fears of an even slower global growth.

The economic news highlight for the week, of course, was the May nonfarm payrolls report, which was a stunner with only 69,000 jobs created, with March and April revised downward by 49,000, and the unemployment rate ticking up slightly to 8.2%.

Agency MBS volume was stimulated by the flight to safety with Tradeweb averaging 131% for the week through Thursday compared to 90% the previous week. Flows, of course, were concentrated in the liquid portion of the coupon stack: 30-year 3.0s through 4.0s as prepayment, the Home Affordable Refinance Program and refi.gov concerns kept investors cautious on up the stack.

By midday on Friday, FNMA 3.0s, 3.5s and 4.0s were at new record highs of 103-01, 105-09+, and 106-19+, having gained 42, 30 and 16+ ticks since the previous Friday's close, while the 10-year note yield was at 1.477%, down 27 basis points.

Despite the flight to safety bid and price levels that occurred over the holiday-shortened week, mortgages "held tough" and traded "surprisingly well." Investors were not especially deterred by the record high prices given the supportive supply/demand dynamics, favorable carry, credit quality, attractive spread to Treasurys, and relatively limited prepayment risk, along with the prospects for a third round of quantitative easing.

Overall, there was better buying from banks, money managers and hedge funds, with servicers and indexers adding to the mix due to duration needs and the month-end, respectively.

Mortgage banker selling is ticking up as mortgage rates decline. However, it was uneventful at a daily average of $1.8 billion compared to $2.6 billion previously. The Federal Reserve's appetite for agency MBS, meanwhile, averaged between $1.1 and $1.2 billion per day providing coverage of around 60% of the supply.

In other mortgage related activity, 15s lagged 30s as the yield curve flattened over 20 basis points to the low +120s (2s10s) area, while GNMA/FNMAs were narrowly mixed with 3.5s and 4.0s higher and benefiting from the FTQ bid. Specified trading was active with call protected paper in strong demand from REITs, money managers and hedge funds. Also notable is that there were nearly $500 million in FN CR pools (>125 LTV) offered.

Mortgages were not able to keep up with the flight-to-safety rally in Treasurys. Barclays Capital MBS Index underperformed Treasurys by 21 basis points over the past five days.

For the month of May, the index lost 64 basis points, which brings year-to-date excess return to just 13 basis points compared to 39 basis points at the end of April. The 30-year current coupon yield declined to 2.66% as of May 31, down 11 basis points over the week and from 2.86% as of April 30. The spread to 10-year notes widened to 108 basis points from 102 the previous Friday and from 95 at the end of April.

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