The events that affected trading this week revolved primarily around $99 billion in Treasury supply. The Federal Open Market Committee (FOMC) held a two-day meeting with the statement, summary of economic projections and a press conference taking up most of Wednesday afternoon.  

While volume was somewhat reduced as many investors waited for the mid-week events, the tone in MBS was supportive. 

There was increased mortgage banker selling ahead of the FOMC as a result of a combination of a sell-off on Treasury supply and less risk aversion as well as originators squaring positions into the uncertain market reaction.  Supply-induced widening, however, was kept in check by opportunistic real money and hedge funds, along with the ever present Fed. 

The FOMC's pronouncements caused barely a ripple in market levels as it was in line with consensus expectations regarding its comments on the economy, labor market, longer term inflation, monetary policy action, as well as, lack of comments regarding Operation Twist and QE3.   

In the subsequent press conference, Chairman Ben Bernanke did state that the Committee was prepared to do more if necessary and that additional quantitative easing remained on the table in the event it was deemed warranted. 

He also indicated he didn't think that bond yields would rise precipitously when purchases end, "at whatever point", in part because the Fed would be holding a sizeable quantity and also because the forward looking nature of markets will have priced this in.  

Heading into this meeting, various measures suggested the market-implied QE3 probability was in the 20%-50% range. As 10-year note yields held below 2.0%, QE3 odds appeared to remain unchanged.  Therefore key data and Federal Reserve speak, of which there is plenty of both next week, will continue to be scrutinized in order to adjust the odds.    

The markets held to a risk aversion mode on Thursday and into Friday afternoon following unimpressive data (Initial Claims and 1Q12 GDP) and ongoing worries about the eurozone. Technicals were mostly supportive on limited supply and buying from servicers, short covering from fast money, and money managers moving down in coupon.

The Fed, of course, remained a steady daily investor in the sector with the latest weekly report indicating buying holding at $1.4 billion per day which covered 70% of the $2.0 billion in daily average mortgage banker supply that occurred over the week.       

In other mortgage related activity, dollar rolls were lower on 4.5s through 6.0s on higher prices and prepayment jitters; 15s underperformed 30s, while GNMAs/FNMAs were lower on prepayment and buyout risks. Trading in specified pools remained active between BWICs and strong demand for call protected paper.

Tradeweb volume remained below normal at 91% for the week through Thursday versus 86% last week. 

Excess return to Treasuries over the past five days on Barclays Capital's MBS Index was -9 basis points with month-to-date performance at -21.  The 30-year current coupon yield rose slightly to 2.91% from 2.89% with the spread to 10-year notes tighter at +94 from +97. Mortgages' trading range recently has been in a narrow range of +94-98. 

Prepayment Outlook

Conventional prepayment speeds are projected to slow around 5% on average in April from March with 4.5% coupons and lower dropping around 10%, while 5.5s and higher are seen slipping only around 2.0% on increased HARP 2.0 refinancing activity. 

The 30-year GN I April speeds are expected to drop 10% on average with 6.0% and 6.5% coupons plunging ~20% after a surge in March due to Bank of America delinquency buyouts.

Agency MBS paydowns are estimated at $118 billion, down from $125 billion in March, while gross issuance is sharply lower at $102 billion from March's $148 billon.

The surge in supply from a $110 billion average from December through February was due to the rush by originators to close loans before a 10 basis points increase in the g-fee took effect on April 1.

The April prepayment reports will be released late afternoon on Friday, May 4.

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