Despite the early week downtrade and strong investor support, mortgage spreads moved tighter last week on limited originator supply. Over the Wednesday-to-Wednesday period, spreads on Fannie Mae 5.5s were seven basis points firmer, 6s and 6.5s were in 11 basis points, and 7s were in 19 basis points. Spread performance in 15-year MBS was similar.
Wednesday's larger than expected rate cut by the Fed could keep the markets fairly volatile for the following several days, suggests RBS Greenwich Capital. In fact, in Thursday morning's trading session, there was heavy profit-taking from money managers and hedge funds on recent price gains. Near term, mortgages should benefit as the sector offers attractive yield and spread. Longer term, however, Greenwich says a milder yield curve will eventually catch up with mortgages, as will higher market levels.