Mortgages continued on a tightening path as the market held range bound, volatility remained low, and supply limited. Originator selling did pick up last week up from the previous week, but just back to average daily amounts of $1 billion. Most of the supply was in 5.5% coupons and was readily absorbed by investors and CMO desks, in particular.
With the trend toward a flatter Treasury curve, primary interest was down in coupon; however, towards the latter part of the week, higher coupons began attracting interest on the recent cheapening and attractive carry. In recent comments from Bear Stearns, analysts noted that 30-year 5.5s through 6.5s offer the best risk adjusted carry after factoring for duration, convexity and implied volatility. UBS also advocates up-in-coupon for leveraged accounts as its researchers believe speeds will slow more than the market predicts. They also like premium mortgages versus the front end of the curve for real money accounts.