The extreme volatility experienced last week in the equity markets didn't quite cause that big of a stir in the bond markets, but nevertheless they were affected. The bigger news, though, was another announcement regarding the GSE regulatory reform bill, known as HR 3703.

"First we saw things rally, then we saw things fall off," said Gary Singleterry, president of New Jersey-based Singleterry & Co. "It seems like the bond market is an inverse mirror image of the NASDAQ. Mortgage spreads widened out quite a bit last week and we've seen them widen out a little bit this week."

Mortgage spreads early in the week were at their widest level since last summer, with swap spreads at a decade-long wide. "Mortgages are sort of hanging in there, maybe a tick or two wider than they were last week," Singleterry said. "But they're kind of following Treasurys pretty closely most of the week."

Another Agency Blowout

Fannie Mae/Ginnie Mae swaps, which had widened over the past couple weeks due to Undersecretary Gary Gensler's remarks about implicit guarantees of Fannie Mae and Freddie Mac securities, came in "quite a bit this week from their wides," Singleterry said.

However, late Thursday afternoon, U.S. Rep. Richard Baker (R., La.), the sponsor of HR 3703, released a statement criticizing Fannie Mae's comments about the bill. "This press release came out a little before 3:00, and within a minute or two, agency debenture spreads widened three basis points, and then mortgages followed that," said Art Frank, director of mortgage-backed securities research at Nomura Securities.

"Every time a public official makes a pronouncement that Fannie and Freddie maybe shouldn't have any kind of implied government guarantee, some investors abroad who own agencies get spooked," Frank said.

Frank highly doubts that the bill will go far in 2000, because there are only about 80 days left in which Congress will meet.

"A mortgage analyst these days is almost a political analyst," Frank said, noting that politics has never been such a driving factor in the market in the 13 years he has been following it. "[Volatility is] not related to intermediate supply and demand. It's not related to implied volatility. It's not related to the shape of the Treasury curve. All the stuff that we're used to doing to analyze what's happening with mortgages don't work."

Freddie Mac Prepayment Data

The rebound in seasonal housing turnover has led to prepayment increases in both discounts and premiums in the month of March. "Amidst considerable origination year volatility, premiums speeds registered single-digit percentage increases on an aggregate basis, but speeds on 1999 production 8s and 8.5s declined 8% to 10% month-over-month," said John Vibert, mortgage strategist at Credit Suisse First Boston.

Speeds on 1993 origination still remain slower than later originations, as Freddie Mac 7s rose just 5% in March, compared to increases of 15% to 27% on 7s produced between 1994 and 1999.

Going forward, Vibert sees discount speeds being driven by seasonal housing turnover activity. "Between March and the seasonal peak in June, existing home sales typically ratchet higher by another 15%," he reported.

"We suspect that housing activity, and therefore discount speeds, will in fact increase another 10% between March and the seasonal peak in June, but increases beyond that appear unlikely," he added, citing the Mortgage Bankers Association's purchase index divergence from the indices supplied by BHK and AFS.

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