Two-way flows were modest last week on expectations of much better buying, as valuations have cheapened to levels not seen in quite some time. Yield curve movement, however, did not really settle down and provide a clear direction, limiting investor support. There was some light overseas buying noted with more expected at current levels. Also anticipated was month-end buying from the indexers, which tends to show up on the last trading day of the month. Meanwhile, servicers were active sellers over the week, particularly in 5% coupons and originator selling in fixed-rate supply has returned to its $1 billion daily average.
More positive on the basis
Most analysts last week had a more positive view on the sector - at least for the very near term. For example, JPMorgan Securities analysts increased their tactical overweight last week on the belief that the sector is poised for a near-term correction, and anticipation of four to six ticks of tightening. Credit Suisse First Boston analysts also upgraded their view to modest overweight from a neutral stance, on expectations of tightening. Historical data over the last six years shows an 80% probability of basis tightening over a 20- and 40-day trading day period from current levels, according to CSFB analysts
Despite the near term positive, the longer-term issues remain intact. Morgan Stanley researchers, for example, were negative on the mortgage basis because of the current lack of specialness, the positive net supply as well as the potential for further curve flattening. Lehman Brothers analysts also maintain a bearish view on the basis, noting that disappearing carry makes it easier to sit on a short position and wait for spreads to realign. Other factors include higher fixed rate supply, and the potential for reduced bank support with deposit growth slowing and C&I lending picking up.
It is approaching that time of the year again when the new conforming loan limits will be reset. UBS analysts note, in recent research, that given the strong home price appreciation recorded this year, they expect the conforming loan limit to rise to somewhere between $410,000 to $421,000 for 2006. In separate research, Merrill Lynch also said that if the average survey price based on the Federal Housing Finance Board's report holds for the next two months, the conforming loan limit would be around $410,000. This would be up from $359,650 this year (see related story p. 18).
activity declines 6.6%
As expected, mortgage application activity was lower for the week ending Sept. 23. The Mortgage Bankers Association reported last week that the Refinance Index was off nearly 11% to 2107, the Purchase Index declined 3% to 483. As a percentage of total application activity, refinancings were 43.9% versus 45.6% in the previous release. ARM share was also lower at 28.8% versus 29.8%, the MBA stated
JPMorgan analysts predicted this week's Refinance Index to drop to 1900. "It was worth noting that the MBS Refinancing Index has not been sub-2000 since April of this year," analysts noted.
Mortgage rates jump higher
Freddie Mac reported gains in mortgage rates for last week. The 30-year fixed mortgage rate moved up to 5.91% from 5.80% the previous week; 15-year fixed rates also gained 11 basis points to 5.48%; 5/1 hybrid ARMs averaged 5.44% versus 5.31% previously; and one-year ARM rates jumped 20 basis points to 4.68%. With the further gains in mortgage rates, application activity is expected to trend lower.
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