The trend last week was moving down-in-coupon as yields remained low and risks increased in premium coupons. In comments last week from Countrywide Securities, analysts noted "higher coupons are currently at risk - not because they're especially rich to lower coupons, but because high dollar prices have introduced a great deal of duration uncertainty."

Last week was also pool notification for 30- and 15-year conventional MBS. The story here, of course, is the FNCL 6 roll that traded through fail. In a recent report from Bear Stearns, researchers expect the short squeeze in FNMA 6s is likely to persist for the next few months. Demand for the coupon has been precipitated by the creation of Mega pools. In July, Bear Stearns notes that $20 billion in FNMA 6s were put into a Mega. This was 40% of all the production in 2004 through Sept. 10. In addition, there have been rumors of another $15 billion for January 2005 settlement. If true, says Bear, the combination of the July and January pools would account for 70% of all the production so far this year. Relief for the short position does not appear to be forthcoming in the near future either. Mortgage rates have dropped in the past several weeks and 6% production is likely to come off.

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