The week revolved primarily around Tuesday's one-day Federal Open Market Committee meeting. For one that was expected to be relatively uneventful, it turned out to have anything but in terms of the markets' response.

A more upbeat assessment regarding the economy, and thus more uncertainty about the prospects of QE3, sent Treasury prices tumbling and yields soaring. By Friday at midday, the 10-year note had lost over two points since last Friday's close with the yield at its highest level since last October at around 2.30%.

The sell-off brought out heavy mortgage banker supply and convexity-related selling from servicers and delta-hedgers, especially on Wednesday of between $5 and $6 billion. Meanwhile, fast money investor buying also lightened up.

By Wednesday afternoon and through Thursday, however, the cheapening drew in active buying from REITs, money managers, banks, overseas and hedge funds. Buyers outnumbering sellers by a reported 4:1.

Into mid-day on Friday, mortgage spreads were 1/4 point tighter based on favorable technicals given that Treasuries sold off further on less risk aversion.

As long as the 10-year note yield remains near current levels or lower and away from the 2.40%-2.50% area where increased duration shedding is expected, MBS are said to be "in good shape".

Of course the Fed remained a steady buyer through all the selling and buying at an average of $1.3 billion per day based on its latest weekly report. This equated to around 60% coverage of the originator supply.

Over the period March 13 to April 11, the Fed expects to buy $29 billion in agency MBS. Based on the recent report, a daily average of around $1.4 billion is estimated over the near term, which provides over 70% coverage on a normal supply day, which has been around $1.8 billion prior to this week's backup.

In other mortgage related activity, dollar rolls strengthened on the decline in prices. The combination of lower prices and stronger rolls of course contributed to a decline in pay-ups in specified pools. The rise in yields also increased demand for extension-protected paper and selling by REITs, hedge funds and money managers in call-protected securities. The 15% coupon outperformed 30s as the yield curve steepened to the mid-190s from +171 as of March 9. The GNMA/FNMA were mostly higher over the week, and FHLMC Golds/FNMAs benefited from the completion of Treasury MBS sales.

Overall, mortgage banker selling averaged $2.2 billion per day compared to $1.8 billion last week. The sell-off boosted Tradeweb volume which averaged 117% for the week through Thursday compared to 101% previously. The 30-year current coupon yield backed up to 3.17% from 2.94% with the spread to 10-year notes one basis point tighter at +89 basis points, slightly firmer to its recent range.

Prepayment Outlook

Speeds are projected to increase around 15%-20% on 5.0% coupons and lower and by about 10% on higher ones. The jump is due to a higher number of collection days at 22 from 20, increased refinancing activity in response to record low mortgage rate levels, and a rush by servicers to close conventional loans before the April 1 increase in the g-fee.

Overall, paydowns are estimated at $132 billion from $111 billion in February with net issuance likely to be negative again as month-to-date gross issuance is currently at $63 billion.

Peeking into April, speeds on average are currently seen slowing around 5% from March as the day count declines to 20 days and to pickup in May on strengthening seasonals and a higher number of collection days (22).

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