Mortgage banker supply picked up last week, averaging $2 billion per day. Investor activity, meanwhile, was mixed with early week interest in the up in coupon despite the outlook for much higher prepayments in the coming months. In comments from Credit Suisse First Boston, analysts believe it is too early to "leg into 6s or 5.5s." They preferred moving into 5s, despite their recent strong performance, due to the attractive hedged-carry and minimal prepayment risk. Still, banks and money managers were better buyers of 5.5s and 6s.

This changed in mid-week as the convexity demand finally started to get more attention. Institutional demand was focused on 5s and lower to pick up duration and reduce prepayment risk. Over the week, spreads were three basis points tighter in Fannie Mae 30-year 4.5s and 6s on an OAS basis. Meanwhile, 5% coupons were two basis points wider, while 5.5s were one basis point firmer. In 15s, spreads were five to six basis points weaker in 4s through 5s. A good portion of last week's originator supply was in 15-year paper.

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