Last week the markets got what has been a rare reprieve so far this year, a break from any market-moving headlines.

This was because economic news was light and primarily consisted of housing-related news, Congress was on a mini-break, while Greece was in the process of finalizing a deal to receive its next bailout installment. As a result, Treasury prices held to a relatively narrow range.

All of this as well as many MBS participants having been out for the holiday-shortened week led to a very light average volume week with Tradeweb reporting average volume of 74% through last Thursday versus 87% the previous week.

Technicals, however, turned more supportive on limited supply and better demand with the market repriced to lower QE3 odds and the 10-year note yield hovering above 2.0%.

Selling from mortgage bankers averaged $1.6 billion per day versus over $2.0 billion over the past several weeks. Meanwhile, Federal Reserve buying covered around 75% of the supply, while money managers and banks easily covered the remainder. Overseas participation though was limited despite the more attractive yield levels.

In other mortgage activity, FHLMC Gold/FNMA swaps were higher as real money investors were more actively buying Gold paper. GNMA/FNMAs, however, were pressured lower, especially in higher coupons.

Ivestors got spooked on increased prepayment risk following a speech by Federal Housing Administration Acting Commissioner Carol Galante at the Mortgage Bankers Association servicing conference held last week in Orlando, Florida. She said an announcement about changes to the streamline refinance program structure of premiums was forthcoming. This would result, she said, in the greater use of the program. Also aiding GNMA/FNMA weakness was less overseas involvement despite the more attractive yield levels. Finally, specified trading remained active with yield buyers taking advantage of the better price and yield levels.

Mortgage performance was fairly steady over the week as indicated by excess return versus Treasuries on Barclays Capital's MBS Index at three basis points bringing month-to-date return to 42 basis points. The 30-year current coupon yield was also stable in the high 2.80s to low 2.90%s with the spread to 10-year notes holding in the high 80 basis point area.

Prepayment Outlook

Speeds on 30-year MBS are currently projected to increase around 6%-7% on average in February from January, while March are anticipated to record addedl strengthening of 10%-15%. The gain is based on a combination of seasonals, Home Affordable Refinancing Program or HARP as well as the rush by originators to close loans before the 10 basis points g-fee increase goes into effect on April 1. Meanwhile, April slows around 2%-3% as the number of collection days drops to 20 from 22 in March.

February paydowns are estimated at $110 billion compared to $104 billion in January, while month-to-date issuance totals $106 billion. The February report will be out late afternoon on March 6.

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