Mortgage spreads moved out last week as a result of strong selling from both sides of the fence. Mortgage bankers averaged between $1.5 billion and $2 billion per day compared with about $500 million in the previous week. The increase came in response to the recent decline in mortgage rates. Money managers, banks, arbitrage accounts and servicers sold almost an equal amount. The sector had been near historically rich levels, and investors took the opportunity to cash in. Also contributing to the weakness was the lack of a CMO bid, no GSE support and a backup in market yields.

Over the Wednesday-to-Wednesday period, spreads were one basis point wider in 30-year Fannie Mae 5s, plus four basis points for 5.5s, and six and three basis points weaker for 6s and 6.5s, respectively. Dwarf 4.5s and 5s moved out five basis points, while 5.5s and 6s were three and two basis points weaker. In early trading on Thursday, spreads were showing improvement as the market rallied on flight-to-quality concerns.

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