Last week was another interesting one in mortgages. Initial focus was on the FNMA 5 roll. The drop rose to 10.25 at one point on Monday from about 7.5 the week before last. On Monday and into early Tuesday, flows were focused primarily on FNMA 5s. Then the flight to quality bid hit on corporate credit concerns and potential hedge fund problems. Spread sectors, including mortgages, were hit by heavy selling to move into Treasurys beginning Tuesday - including over $1 billion in MBS selling from fast money. Treasurys continued to rally on Wednesday bringing the 10-year Treasury yield to 4.15% at one point, re-igniting refinance fears until the 10-year moved back towards 4.20%. The heavy selling mid-week moved mortgage valuations to fair to slightly cheap, and Thursday saw active buying as Treasurys gave up additional ground following a strong retail sales report.

Outside of the current market jitters associated with corporates, mortgages are currently seen as directional - strengthening on sell-offs and weakening on rallies - with spreads overall holding in a relatively narrow range. The tone is improved from recent weeks with analysts mostly neutral to slightly positive with yields hanging around the middle of their range. Technicals are considered favorable with supply holding at around the $1 billion per day mark. Overseas buyers tend to be more interested in mortgages when the 10-year is in the 4.25% area or higher, meaning there is also potential support now from corporate cross over buying.

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