Despite Friday's looming payrolls report, money managers, banks, insurance companies, dealers, and others were active buyers of mortgages. This was due in part to the recent cheapening, the beginning of a new quarter, and substantial cash positions. Technicals are also playing a part in the favorable performance. Originator supply remains modest at about $1 billion per day on average.

Historical performance is also supportive of mortgages going into payrolls. RBS Greenwich Capital Managing Director Alec Crawford said vols typically drop after the number is released, and so mortgages tend to do well on payroll Fridays. Over the near term, any pullback in the market should lead to increased demand as there is still plenty of cash sitting on the sidelines. The long-term outlook is less certain given Fannie Mae's accounting woes and EITF 03-1. However, technicals may continue to benefit the sector. JPMorgan Securities expects marginal net growth in the fixed-rate market. In fact, researchers anticipate 2004 net fixed-rate issuance to be the lowest ever.

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