It was a very active week in the primary and secondary mortgage markets as all sectors responded favorably to the equity rebound on favorable earnings announcements last Thursday, and giving just minor notice to the flare-up in tensions in the Middle East.

Pass-throughs saw active flows with better buying late last week, following the recent cheapening. Interest was focused on down-in-coupon moves due to the lower rates.

Near close last Thursday, 30s were outperforming by 3.5 ticks with 15s better at +5.1 ticks as the five-year part of the curve turned lower on some curve inversion.

Ginnie Maes slightly outperformed conventionals, benefiting from recent support of high quality assets from Pimco's Bill Gross.

In fact, many market players found it strange that Ginnie Maes did so well versus Fannie Maes, considering that the news regarding the "truce" between Rep. Baker and the government-sponsored enterprises would be expected to cause Fannies to outperform; instead, just the opposite happened.

"Ginnie 6.5s and 7s outperformed, which is kind of peculiar," said Art Frank, the head of MBS research at Nomura Securities. "I'm mystified. Why did somebody pick today to buy a large volume of Ginnies?"

On the news of the GSEs somewhat giving in to Baker last week, the agency market had a great day. Ten-year benchmarks were in seven basis points, from 105 over to 98 over.

Swaps were in approximately five to six basis points, so agencies tightened a couple compared to swaps. But Ginnie Mae bonds outperformed for the November settlement: Ginnie 7s were up 10.5 ticks, and Fannie 7s up 8.5 ticks, so the Ginnie/Fannie swap in 7s went from 20 ticks to 22 ticks.

"This is strange, since Ginnie credit stayed the same but the Fannie market ostensibly got better," said another MBS market observer.

Apparently, there was a good-size buyer of Ginnies in the market, sources said. It was not clear who the buyer was, since sources saw the buying from dealer-to-dealer activity seen on their screens.

"I think that the Ginnie Mae phenomenon is largely due to a separate issue, unrelated to the Baker/GSE events of this past week," said another MBS researcher. "Ginnies usually appeal to foreign investors, so I think that may have something to do with it. With the Treasury buyback still going on, Ginnie Maes have become somewhat of a surrogate, and that trend continues to bolster the Ginnie market."

Also last week, Freddie Mac priced its $7 billion reference notes and bonds. The reopened 5s priced at +80 and the new 30s at +100. Pricing benefited from the announcement last Thursday of new initiatives that the GSEs will implement programs to increase their financial transparency.

In commercial mortgage-backed securities, the sector saw the pricing of the $765 million Morgan Stanley Dean Witter Life issue (see p. 8). Also, a new issue started marketing: a $500 million Hilton private placement issue, and still waiting to price is the $889 million Bank of America deal. Both are expected to price this week.

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