Ahead of the Federal Open Market Committee meeting last week, mortgage flows were quiet but picked up sharply following the statement that suggested the FOMC is nearing an end to its tightening cycle. Following the announcement, mortgages saw active two-way trading with buying from real and fast money and banks - particularly in 5s and 5.5s - with profit taking showing up as spreads hit daily tights. Servicers have been relatively quiet lately, however, if the 10-year Treasury yield moves through 4.40%, they are expected to become active buyers - particularly in 5% coupons. Originator selling was mostly average at $1 billion per day, however, with the strong rally on Wednesday, supply totaled nearer to $1.5 billion.

The near-term outlook has turned more favorable. In mid-week comments, JPMorgan Securities analysts suggested covering tactical basis shorts and shifting to neutral. They expect real money purchase activity in early January. Also, they anticipate additional outperformance of perhaps three to five ticks if the 10-year Treasury remains between 4.40% and 4.60%. In research from UBS, analysts are maintaining their modest overweight as mortgages are expected to continue trading in their recent ranges, waiting for additional information on whether the FOMC has completed its tightening cycle.

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