While the news of the week should have been the Federal Open Market Committee raising interest rates, mortgage market observers were more concerned with the U.S. Treasury Department's announcement that it would be repurchasing some of its debt, creating an inverted yield curve.

For the four-day trading period ending Feb. 2, spreads for the current coupon mortgage to the 10-year Treasury have widened 22 basis points, to 150 from 128. "Associated with a lot of buying of long Treasurys and selling the spread product, there's been a pretty quick blowout in spreads ranging across product areas from swaps to mortgages," said Art Frank, director of mortgage research at Nomura Securities. "And that kind of overwhelms in significance to anything that is going on with the Fed."

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