Mortgages saw a fairly active week with better buying, particularly in the lower coupons, which had cheapened in the previous week on heavy selling from banks. The tone was more supportive than in the previous week, and helped by stable yield levels with the 10-year Treasury holding in the 4.60% area. At this yield area, mortgages had a reprieve as servicers did not need to add duration, and originators didn't need to sell TBAs to lock in spreads on new loans written. Volatility also held low with the fairly stable market. On top of this, the end of the week offered the traditionally supportive events for mortgages - the employment report and September paydowns. Typically, mortgages benefit from the decline in volatility following the payrolls report. Meanwhile, paydowns are estimated at about $40 billion.

Investor participation was widespread and included money managers, fast money and servicers moving up and down the coupon stack, although 5.5s and 6s were most favored. Investors, however, did not ignore the cheapening in 5% coupons, despite the risks of the slowing in the housing market and its impact on prepayment speeds. Asian investors, although not totally absent, were relatively quiet as China was on a weeklong holiday. On the originator side, selling was limited and held to less than its usual $1 billion per day average, although there was expectation of it picking up on Thursday as the market traded lower.

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