Despite the holiday-shortened trading week, with many participants away on vacation, the mortgage sector was fairly active. Originator selling and profit taking was relatively strong at about $3 billion to $4 billion dollars early in the week as Treasuries traded lower. The resulting spread weakness, however, attracted buyers particularly from servicers, CMO dealers, banks and money managers. As a result, spreads were just one basis point wider on the week for current and cusp coupons.
The strong performance within the mortgage sector so far this year, is encouraging ongoing profit taking from accounts. According to JPMorgan's bi-weekly MBS Client Survey, the share of overweights fell to 38.6% from 45.8% in the previous report. At the same time, the share of neutrals increased to 50.0% from 43.8%. Several firms on the Street also have either reduced their overweight positions or moved to neutral at this time. The outlook, however, is still supportive for the sector with high paydowns continuing the need for reinvestment, a range-bound market, declining issuance, strong CMO issuance, and declining vols.