There were modest rebounds early last week after the previous week's flight-to-quality rally on subprime write-down fears. The highlight on the subprime topic through midweek last week was the departure of Citigroup Chairman and CEO Charles Prince and the banks expected write-down of $8 billion to $11 billion or more in subprime related investments in Q4. From the markets close Friday, Nov. 2 through Tuesday, Nov. 6, the 10-year Treasury note lost 17/32, with the yield increasing to 4.3% from 4.2%. The 2s10s curve steepened as well to 68.2 basis points from 65.8 basis points. In mortgages, volume in the first half of the week was about normal in mixed flows. Volume ticked up sharply Monday, and swap spreads moved wider with the Citi news, as well as on rumors about the potential write-downs at other financial institutions. MBS traded poorly as a result, with active selling from servicers, hedge funds and money managers. And weakening in rolls didnt help. The widening brought some buying interest in the overnight market that was met by active selling from the domestic side Tuesday. At noon, with mortgages wider by nine ticks to swaps, heavy buying emerged from a wide range of investors. In general, flows were directed primarily up in coupon, and 15s saw good support.
Originator selling through midweek averaged between $1 billion and $1.5 billion. Supply was concentrated primarily in 6s and to a smaller extent in 5.5s.