Despite record high prepayments, mortgages were the second highest performing sector in 2002. According to researchers from Lehman Brothers, through mid-December, the MBS Index outperformed Treasuries by 150 basis points. Mortgages benefited from limited net supply, strong demand, and excellent carry. These same themes are expected to carry over at least through the first quarter of 2003. For the record, the top performing asset class was CMBS, which recorded excess return of 205 basis points through mid-December, while corporates were the worst at minus 250 basis points.
Market activity over the holidays was predictably slow as many participants took time off or closed their books for the year. Over the last 10 days of 2002, Fannie Mae 30-year 5.5s moved out 13 basis points, while 6s through 7s were six basis points wider. Dwarf 5s through 6s weakened six to 11 basis points.