Worries about yields dropping below 4% were replaced last week by concerns about Fannie Mae and the Office of Federal Housing Enterprise Oversight's (OFHEO) accounting probe. While the sector saw better profit-taking, there was buying from money managers, banks and others on the spread widening. Overall, spreads held up fairly well over the week. Meanwhile, 30-year Fannie Mae 4.5s and 5s were two basis points weaker and flat, respectively; 5.5s and 6s tightened one basis point; and 6.5s, which continue to benefit from their technical situation, were in two basis points. In 15s, spreads were flat to slightly weaker in 4s and 4.5s; and one and three basis points better in 5s and 5.5s.

Last week Fannie Mae announced it had entered into an agreement with OFHEO regarding issues raised in a recent report. As part of the agreement, the GSE said it would "achieve and maintain a capital surplus target of 30 percent within the next 270 days." Of concern to the MBS market is the potential for Fannie Mae to sell assets and reduce debt to help meet its capital requirements. While continued market uncertainty is expected, it seems the selling of mortgage assets to meet capital requirements is less likely, according to analysts (See story on p.18).

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