Mortgages continued to perform well through the second week of the New Year despite 10-year note yields declining below 1.90% (to 1.857% Friday morning) on continued uneasiness associated with Europe.

Aiding the supportive tone was preference by investors for the yield, high credit quality and liquidity provided by Agency MBS versus other sectors. Month to date excess return versus Treasuries on Barclays Capital's MBS Index was at +33 basis points through January 12 versus +17 basis points the close of last week.

This week's main trading influences were prepayments, dollar rolls and supply. Conventional prepayments slowed as expected in December as a result of slightly lower refinancing activity in November that was partially offset by an increase in the number of collection days. Of particular interest was larger than expected slowing in 4.5% and lower coupons, while higher coupons prepaid faster than expected, especially 6.0% and higher.

The report in turn contributed to strengthening in dollar rolls on 3.5% through 5.0% coupons heading into Class A (30-year conventional MBS) notification, as did the looming fails charge that becomes effective on February 1. Meanwhile, higher coupon rolls were pressured on increased prepayment uncertainty associated with HARP 2.0 given the recent white paper and speeches from various Fed officials.

Originator supply moved higher to a $1.7 billion per day average through Thursday from $1.1 billion in the previous week. Overall, it was well absorbed by the Fed, banks, money managers and hedge funds.

Speaking of the Fed, they reported $8.75 billion in MBS net purchases over the week ending January 11, or $1.75 billion per day, representing 117% coverage of the mortgage banker supply over this time frame. Meanwhile, overseas was quiet in the first half of the week, but was a buyer in the latter part and focused in Ginnies as usual.

In other mortgage activity, 15s held up fairly well to 30s with demand noted from banks, money managers and structured desks. With dollar rolls stronger earlier in the week there was active selling in specifieds versus TBAs with payups under pressure. Mid-week, however, decent demand reportedly was being seen from real money in low payup pools, while other investors such as REITs were focused in higher payup ones.

Finally, with the increased roll volatility and pressure on payups, Treasury BWICs apparently took a break over Tuesday and Wednesday with $2 billion in sales in total on Monday and Thursday.

Tradeweb volume averaged 111% for the week through Thursday compared to 107% in the prior week. The 30-year current coupon yield declined to 2.93% from 3.0% with the spread to 10-year notes tightening to +100 basis points from +103.


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