Last week's trading focused almost exclusively on FNMA 5s - at least until Federal Reserve Chairman Alan Greenspan began speaking. Throughout the week, the focus on FNMA 5s took attention away from other market activity, making new issue CMO activity difficult and relative value trading precarious, JPMorgan Securities analysts wrote.

Buying picked up in other coupons, finally, as the roll weakened when the market backed up ahead of Chairman Greenspan's testimony on Thursday before the Joint Economic Committee and held higher as he seemed to indicate the market is not at neutral yet.

"We don't have the statistical capability to forecast where it is or to judge it other than being in place at a certain time and looking at what the specific events are, because that means we don't have to forecast what happened, we just can observe," Greenspan stated. There is plenty of cash waiting to be deployed, and real money investors were getting their opportunity - finally - as the 10-year moved closer to 4%. There was good buying interest in 30-year 4.5s and 5.5s, as well as in 15-year 4.5s and 5s last Thursday.

On the supply front, it has picked up slightly and is running slightly over the $1 billion daily average. About 75% of supply is coming in 5% coupons at this time.

Over the week ending last Wednesday, spreads on 30-year Fannie Mae 4.5s were one basis point wider; 5s were unchanged; and 5.5s and 6s were four and six basis points wider, respectively. Meanwhile, 15s were five basis points wider in 4s and 4.5s; three basis points wider in 5s; and one basis point weaker in 5.5s.

Refi Index increases 10%

in response to lower rates

Mortgage application activity responded modestly to the decline in mortgage rates for the week ending June 3.The Refinance Index rose a seasonally adjusted 10% to 2362, according to the Mortgage Bankers Association.

The MBA used a one-half day adjustment for the Memorial Day holiday. If a one-day adjustment had been used, the index would have increased to over 2600. Meanwhile, the Purchase Index was up less than 4% to 479. Overall, application activity was up 6.5%.

With the decline in fixed mortgage rates, ARM share has dropped as refinancing share increases. The MBA reported that refinancings, as a percentage of total application activity, were 42.9% versus 41.2% in the previous report, while ARM declined to 31.7% from 33.3%.

30-year sets new record

low for year

Freddie Mac reported mortgage rates declined five to nine basis points for the week ending June 10, in response to the latest rally. The 30-year fixed rate mortgage averaged 5.56% versus 5.62% last week.

The previous low was 5.57% recorded for the week ending Feb. 10. It is also the lowest rates have been since April 1, 2004 when the 30-year was at 5.52%. The 15-year fixed mortgage rate printed at 5.14%, down six basis points; the 5/1 hybrid ARM rate fell nine basis points to 5.01%; while the one-year ARM rate was down five basis points to 4.21%.

Looking ahead to this week's mortgage application activity report, JPMorgan expects the Refinance Index to increase to between 2500 and 2600 from 2362. Meanwhile, Bear Stearns stated that in order for refinancings to pick up significantly, the 30-year mortgage rate would need to fall below 5.60% and remain there, which is seen as a 3.85% on the 10-year.

Furthermore, Bear Stearns said that for the market "to see a pickup in refinancing activity that truly taps into the vast 5.5% coupon bucket, one would need at least an additional 10 basis point decline in rates below the 5.60% mortgage rate threshold."

At this time, about 33% of the market is considered fully refinanceable, with 60% considered marginally refinanceable, according to UBS.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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