A record-breaking sale of debt from Fannie Mae last week kept a majority of fixed-income observers out of the mortgage market, helping keep spreads relatively at par with last week's close.

However, investors soaked up the Fannie Mae issuance, keeping agency spreads at bay as well.

"It's been a tight-range week," said Art Frank, director of mortgage-backed securities research at Nomura Securities. The market closed Friday, July 28 with the current coupon at 186 over, and closed there again last Thursday.

"I think that how well the Fannie deal went said that there's plenty of money to be put to work in spread product," Frank said. "We didn't widen agency spreads and we didn't widen mortgage spreads."

Over the past week, Frank said mortgages have become priced at fair value, given the higher volatility on longer swaptions. "With Fannie Mae current coupons being 64 basis points over the 10-year swap rate, and 81 basis points over the 10-year agency benchmark," mortgages are fairly valued, he said.

Up-in-Coupon Recommended

With Fannie Mae prepayment speeds due out today, which should show some relatively fast speeds, up-in-coupon trades are recommended as investors head into the fall months.

Trades out of 7s and 7.5s and into 8.5s are suggested because "we think there's going to be a sharp seasonal decline going into the fall in housing turnover and I think that when the 6.5 and 7 speeds slow, along with the premium speeds as well, we think 8.5s are going to look real good," Frank said.

Over the past week, Ginnie Mae bonds have moved from a buy to pretty much fair value, as the 8s moved from a half a point above Fannie Maes to 21 ticks over by the end of the week.

For Ginnie Mae 7.5s, they had tightened to 17 ticks over Fannie Maes, and widened out to 23 over by the end of the week.

"So I'd say where a week ago, Ginnies were cheapening up and looking like a buy, now they are pretty fair value," Frank said.

Home Sales Fall

For the third straight month, new home sales fell in June to a seasonally adjusted annual rate of 829,000. That is a 3.7% drop from the revised May number of 861,000 and 13% below the June 1999 rate of 948,000.

The slowdown in new home sales is suggesting that Federal Reserve rate increases over the past year to slow the economy are finally starting to take hold. The release of the June new home sales figures may indicate that the Fed will not raise rates again at its August 22 meeting.

New homes sold in June had a median price of $159,000.

FHLBank Starts FHA Program

The Federal Home Loan Bank of Cincinnati is starting a pilot program to purchase Federal Housing Administration-insured loans from member institutions, and it has hired Kyle Lawler to run the program. Lawler has been hired to run the Cincinnati FHLBank's Mortgage Purchase Program, which will also purchase conventional loans when it is fully phased in.

Currently, a handful of members are participating in the FHA pilot program. The FHLBanks of Cincinnati, Seattle, and Indianapolis have banded together to create the MPP as an alternative to the Chicago FHLBank's Mortgage Partnership Finance program. Both programs are designed to give member institutions a secondary market alternative to Fannie Mae, Freddie Mac, and Ginnie Mae.

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