Mortgages generally were treading water last week. Volume was mostly below normal, though flows were generally balanced overall with the up-in-coupon trade more favored. According to Lehman Brothers, from the month to date through April 18, the MBS Index was up 14 basis points, having gained only a basis point since the previous Friday's close. The sector's performance for April, however, remains favorable compared with competing sectors: ABS (five basis points over), CMBS (five basis points over) and corporates (18 basis points over).

The higher yield levels and widening in OAS have failed to really stimulate strong buying. In midweek commentary, JPMorgan Securities analysts noted some recent concerns mentioned about MBS. There is the uncertainty regarding a rebound in volatility, as it is so low currently. Another is that the recent steepening in the curve has added to mortgages' duration and has pushed spreads wider. The final one is the recent heavy supply in 30-year fixed product. While supply has been on the rise, analysts believe that most of it is absorbable by overseas investors as well as banks and that hedge funds and money managers will pick up the remainder. In addition, analysts also anticipate that the widening in OAS will encourage money managers to become more active.

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