May was a bust for mortgages. According to Lehman Brothers, the MBS Index recorded excess return versus Treasurys of negative 23 basis points for the month. As June starts, it looks like it will continue to be a difficult environment for mortgages as volatility is expected to remain elevated with the Federal Open Market Committee's focus on economic data in order to determine when and if they can pause.

Other factors are also not supportive for mortgages. These include the ongoing lack of Asian participation and high dealer inventories. Domestic banks and money managers have also limited their participation given the risks. These issues are not anticipated to change much until there is clarity regarding Federal Reserve action. Additionally, there are concerns regarding extension risk associated with the slowing housing market.

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