Mortgages experienced modest two-way flows last week as the 10-year Treasury yield hovered around 4%. Servicers were good buyers in the lower coupons, while hedge funds and money managers were active both up and down the coupon stack seeking carry and convexity. Originators, meanwhile, remained at $1 billion per day on average. Mortgage participants were noticeably inactive in the Treasury or swaps market. It is generally expected that it would take a move to 3.9% and below to really stimulate activity in those markets. Over the week, spreads were tighter by two to three basis points in 30-year Fannie Mae 4.5s through 6.5s, and one basis point better in Dwarf 4.5s through 5.5s.

Most firms are neutral on mortgages given the current yield levels. In recent comments from Deutsche Bank Securities, for instance, analysts noted that while 4% on the 10-year is not seen as a major prepayment threshold, it is still seen as a significant event by many MBS participants. In addition, Deutsche added that these yield levels are not conducive to bank support unless interest rates stabilize. The looming presidential election and October nonfarm payrolls also suggest the risk of higher volatility in the near term.

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