With the non-seasonally adjusted Refi index shooting up by more than 15% last week and a continuing rally in rates, the mortgage market is positioned at the cusp of a moderate-size refinancing wave, sources say.

"If we go a little lower from here in rates, we will have a pretty good Refi wave that takes 8.5s to above 30 constant prepayment rate (CPR) and 8's above 20 CPR," said Art Frank, the head of MBS research at Nomura Securities. "But if we go back up to 7.30% on the current coupon, we probably won't have that Refi wave."

Moreover, trading reflects that premium coupons have not been doing well recently, but there is substantial fear in the market that if rates go just a bit lower there will be a Refi wave in early 2001.

The current coupon Fannie Mae came down by 23 basis points last week in a matter of three days. Moreover, Freddie Mac's report on mortgage rates showed some of the lowest numbers since the summer of 1999.

"But that doesn't mean too much, since rates were even lower before the summer of 1999, and even lower in 1998," commented another MBS expert. "The market may be moving in one direction, but I don't believe it will necessarily cause a prepayment wave."

The main reason for this is that most of the mortgage market in not refinancible, the source said, and only a very small percentage of it is contributing to the faster prepayment speeds that are coming out. "The housing market is almost certain to slow down next year," the source added.

But buysiders were running for cover last week, as a recent rally in Treasurys and signals from the Federal Reserve that an ease in rates would be in the near future led to widespread worry.

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