The first half of last week saw a reprieve from the subprime tape bombs. In fact there was some encouraging news with Goldman Sachs saying it didn't expect to report significant write-downs, while Bear Stearns reported it would take a much less than expected write-down. This helped the markets calm down with equities rallying (helped by financials that were considered oversold) and Treasurys giving back some of their recent gains. At last Tuesday's close, the 10-year Treasury closed down 8/32nds from Friday (Monday was a holiday) with the yield up three basis points to 4.255%; 2s10s were flatter at 73 basis points, down from 79.5 basis points previously.

The retreat, along with a dip in volatility and tightening in swap spreads, brought out active buying in mortgages on Tuesday as investors took advantage of the significant widening. Noted in particular was buying from money managers and hedge funds in 5s and 5.5s, overseas interest in 6s and servicer buying in 5.5s and 6s against swaps and Treasurys. Selling was picking up on Wednesday morning as the market held to a narrow range-equities included. Overall, supply was averaging between $1billion and $1.5 billion through Wednesday.

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