Flows were mixed last week as investors returned from their long winter nap. Selling to move down in coupon was noted from hedge funds, insurance companies and servicers. Originators, meanwhile, were average to slightly below average sellers on the week. Over the week ending last Wednesday, spreads were flat to slightly tighter in 30-year FNMA 4.5s through 5.5s, and two to three basis points wider in 6s and 6.5s. The widening in the higher coupons was due, in part, to curve flattening and profit taking. This also impacted higher coupon FNMA rolls. For example, the drop in yield for the 6% coupon was at 5.75% last Thursday from 6.875% earlier in the week. The weakening encouraged hedge funds to switch and begin buying Ginnie Mae and Gold 6s.

The outlook for mortgages in 2005 appears favorable, though performance is not going to be as strong as 2004, report Bear Stearns analysts. In recent comments, analysts said this year's showing depends on several factors, the first being the direction and volatility of interest rates. Bear Stearns notes a steady flattening of the curve with a modest response from the long end make for a good market for MBS. The second is the investment appetite of Asian central banks. Asian buying of MBS picked up last year and is expected to continue due to higher U.S. dollar reserves in China and Japan. The third is the effect of new MBS products that could impact prepayments and fixed rate agency supply. Other factors supportive of MBS, added UBS, include declining volatility as the market backs up; corporate crossover buying; leading UBS to believe net fixed supply will be negative for 2005.

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