Last week's mortgage-backed market saw active two-way trading, with originator supply averaging $2 billion per day, primarily in 30-year 5.5s. Money managers, banks and hedge funds - taking advantage of early week widening on profit taking and adding to positions - readily absorbed supply. In addition, the week saw heavy buying in 30-year 6% coupons. In fact, that coupon tightened 16 basis points over the Wednesday-to-Wednesday period. Meanwhile, 5.5s moved out 13 basis points, 6.5s firmed three basis points, and 7s were one basis point wider. Additionally, 15s lagged 30s with 5% and 6% coupons wider by five and three basis points, respectively. Dwarf 5.5s were the best performing coupon in the sector, tightening six basis points on the week.
Overall, the Street is neutral to positive on the mortgage sector. After recent strong performance and this latest rally, profit taking and a prolonged prepayment wave could lead to near term widening. Past that, the sector continues to have very favorable demand/supply technicals. The record paydowns have to be reinvested and alternative sectors do not provide the yield or quality.