A week after the New York Federal Reserve's announcement regarding the acceptance of mortgage-backed securities as collateral in repurchase transactions, the market seemed quite content and sated for the moment, happy to absorb the action as a follow-up to already-lower levels of volatility.

"If the cake was baked, the New York Fed iced it and put candles on it," said Michael Youngblood, managing director of real estate and capital markets at Banc of America Securities.

The announcement helped give mortgage participants comfort that players would not see involuntary sales of MBS at year-end due to extreme events, sources said. Now, if a dealer were unable to finance mortgage positions over year-end, they can turn to major banks and get those positions financed through the Fed.

Though the rule is not expected to create any new net demand for MBS, it would lift any "shades of 98" concerns from the market relative to year-end, Youngblood said.

Otherwise, last week proved to be a relatively slow week for the mortgage market, with fairly continuous tightening of spreads.

"From our side, we've been very quiet," added Ken Boertzel, who manages $5 billion in MBS at New York Life. "Mortgages have outperformed Treasurys quite a bit and tightened versus swaps. There is still a fairly heavy corporate supply calendar and accounts are still overweighted in mortgage product. But some people are still licking their wounds from a couple of months ago."

"We've seen some reasonable buying of Ginnie Mae II's, interestingly," said John Carson, head trader at Morgan Keegan.

At midweek, mortgages were closing at around 152 basis points over the 10-year Treasury note, as compared with 173 over at the beginning of the month.

"So I'd say it's been a great month," said Art Frank, head mortgage researcher at Nomura Securities. "Spread product has come in after reaching very wide levels in August, and swaps are in 19 for the month."

This past week, swaps outperformed the mortgage market, but mortgages did well against Treasurys. The 10-year swap spread closed at 108 at the end of August, and it hit 89 over by the end of last week.

"Spreads are coming in to more normal historical levels after spread widening this summer," Frank commented. "Going forward, there will be some easing of supply pressures. Last week's Fed announcement changed the tone of the market, truly alleviating year-end fears."

The current coupon Fannie Mae was about six basis points tighter on the week. Similar improvement was seen in prime nonconforming paper and CMBS, sources said.

The one area where comparable spread tightening has not been seen is in the area of subprime issuance, where there is as much as a $30 billion overhang of transactions during the next four weeks.

"The supply bottlenecks are there," said Banc of America's Youngblood. "The market is processing two key components of performance - declines in volatility and new-issuance volume - favorably, and we think that our spreads can narrow as much as another 17 basis points. Our target is a 70 OAS by our metric for the current coupon Fannie Mae by the end of the year."

Youngblood also said that he expects $25 billion a month in agency passthroughs and $5 billion a month in nonagency and CMBS were expected by December, representing 50% declines from the June numbers.

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