Last week, the subdued flows favored up-in-coupon trades in both the 30- and 15-year sectors. Activity was supported by a wide range of accounts including banks, money managers and hedge funds in the early part of the week. However, profit taking became evident at the latter end. Buyers are likely to be less active until the 10-year yield crosses above the 4.85% level.

Roll-related trading was also evident all week with 48-hour notification beginning on Thursday for 30-year conventional MBS. The 6% coupon, in particular, held very special. One trader recently remarked on this situation, suggesting it could push higher into notification as dealers and investors cover front-month shorts. He also said there were still very few sellers of the roll.

Originator selling remained lackluster, averaging less than $1 billion per day. The limited production, along with the steady support, is keeping the technical picture favorable in the mortgage sector. Overall, analysts are positive to neutral on the sector.

Over the past week, spreads were one basis point tighter in 30-year Fannie Mae 4.5s and 5s, three basis points better in 5.5s and four to five basis points firmer in 6s and 6.5s. In 15s, spreads were also in one basis point for 4.5s, while 5s and 5.5s tightened five and six basis points, respectively.

Mortgage application activity drops in holiday week

Mortgage application activity fell for the week ending June 4, according to the Mortgage Bankers Association (MBA). This was not unexpected given the holiday-shortened week. The Purchase Index dropped 6% to 432, while the Refi Index plunged 14% to 1363. It was one year ago that the Refi Index hit its record high of 9978, said the MBA. The figure is down 86% year-over-year. As a percentage of total applications, refinancings were 32.6% versus 34.3%. ARM share rose to 34.6% from 33.9%. Looking ahead to this week's release, JPMorgan Securities predicts the adjusted Refi Index will be marginally lower.

Fixed rates hold steady;

ARM rates jump

For the week ending June 11, Freddie Mac reported slight gains in fixed-rate mortgage rates. The 30-year rate rose just two basis points to 6.30%, while the 15-year rate gained four basis points to 5.67%. The ARM rate, however, jumped 16 basis points to 4.14% and is at its highest level for this year. Furthermore, the ARM rate is 78 basis points off its low of 3.36% recorded toward the end of March.

In its latest forecast, the MBA expects the 30-year fixed-rate mortgage rate to average 6.7% in the fourth quarter of this year versus an average of 5.6% in the first quarter. They predict that at year-end, refinancings will be down to 32% of total applications versus 59% in the first quarter. ARM share, meanwhile, is estimated to increase to 42% from 27%.

FNMA speeds in line

with expectations

Fannie Mae prepayment speeds came in pretty much as expected. Speeds were in line with consensus expectations for 5s through 6s. Meanwhile, 2001 6.5s and higher coupons prepaid modestly faster than expectations. As far as Freddie Mac prepayments go, speeds between the two agencies are converging across most vintages.

Ginnie Mae speeds declined faster than expected for 6s and 2002 5.5s, and were in line with expectations for 6.5s and certain 7% vintages. Also, 2003 5s prepaid slightly faster than consensus expectations. Bear Stearns said that prepayment anomalies in the discount sector between Fannie Mae and Ginnie Mae continue to recede. Analysts attribute the anomaly over the past several years to servicer buyout activity. With the market moving under par for most coupons, there is less incentive for the buyout activity going forward, said Bear Stearns.

Paydowns totaled around $77 billion with the amount of outstanding fixed-rate agency MBS increasing by more than $10 billion, according to JPMorgan. Next month, researchers predict paydowns to fall to $60 billion.

In the months ahead, speeds are expected to show continued sharp declines. Early indications suggest 30-year Fannie Mae 5.5s and 6s slowing around 30% in June, with 6.5s and 7s declining around 20%. In July, the current outlook is for speeds to fall another 15% to 20%. For specific cohorts, 2003 5s are anticipated to prepay at 11% CPR in June versus 12% in May; 5.5s are looking to prepay at 16% versus 23%; and 6s at 25% CPR versus 35%. June's data will reflect a 6.06% 30-year mortgage rate, which is 40 basis points higher than May, according to Lehman Brothers.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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