In the last MBS Recap, it was noted mortgage spreads had widened an average of 16 basis points over the Wednesday-to-Wednesday period. In the latest week, spreads have weakened an additional 10 basis points. Thirty-year 7s have experienced the greatest widening as the coupon is "in-the-money" for refinancings. On the other hand, 6s experienced the least widening as investors move into that coupon and even into 5.5s to add duration and reduce convexity risk. Spread widening was primarily due to increased volatility and firm Treasurys.

Last week finally saw some of that originator supply that has been building up. Over the Friday-through-Wednesday period, mortgage banker selling totaled between $15 billion and $20 billion. While the supply was heavy, it was readily absorbed by hedge funds, money managers, mutual funds, banks, and, to a lesser extent, indexers on month-end extensions. The wider spreads, combined with the generally underweighted positions of money managers and ongoing uncertainty in equities and corporates, are all keeping mortgages well supported. For these reasons, mortgages do not have the ability to widen significantly, according to Greenwich Capital Markets. In addition, notes Greenwich, the new month tends to bring traditional positives that support mortgages: the employment report and the calendar flip.

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