Buyers were more reluctant last week to add to their positions given the very rich levels. The early part of the week saw some support from banks, as the market held within a narrow range and supply was nil. As the market rallied mid-week, however, profit taking picked up.

Over the Wednesday-to-Wednesday period, spreads on 30-year Fannie Mae 5s and 5.5s were flat to one basis point tighter. Also, 6s and 6.5s were one to two basis points wider. Dwarfs were flat to two basis points tighter.

In mid-week comments from JPMorgan Securities, analysts said that mortgages appear more vulnerable to rallies than to extension. "The decline in rates takes out the marginal bank buyer and slows CMO demand," the firm said.

JPMorgan added, however, that MBS holdings remain relatively low at banks. This suggests the ability to add during market selloffs.

Mortgage applications increase slightly overall

The Mortgage Bankers Association (MBA) reported a mixed mortgage application report for the week ending Oct. 17. The Purchase Index rose 7.5% to 386, while the Refi Index fell 6% to 2204. As a percentage of total mortgage activity, refinancings were 50.5%, down from 53.9% in the previous report. ARM share increased to 26.2% from 25.2%.

Freddie Mac reported mortgage rates held within a narrow range for the week ending Oct. 24. The 30-year fixed rate mortgage rate was unchanged at 6.05%. This was in line with Citigroup's expectations. The 15-year fixed rate mortgage rate rose three basis points to 5.39%, while the one-year ARM rate fell three basis points to 3.76%.

If rates hold at current levels, Lehman Brothers says it expects the Refinancing Index to be close to 2000 in coming weeks.

Modest prepayment declines expected for October

According to Bear Stearns, the agency market is now only about 50% refinanceable. The average incentive for all pools is around 50 basis points, analysts say. This compares to nearly 150 basis points at the height of the refinancing wave. Currently, 6% coupons are marginally refinanceable, though a 10 basis point selloff would push them out of the refi window. Meanwhile, 6.5s remain fully refinanceable, though a 50 basis point backup would push them out as well. Bear calculates this "selloff" threshold corresponds to a 6.60% mortgage rate and a 4.85% 10-year.

For the October prepayment report to be released Nov. 7, consensus anticipates speeds to slow around 15% to 20% for 30-year 5.5s through 6.5s. November's slowing is predicted to be in the 5% to 10% area, while December is expected to be unchanged to slightly higher.

The table on this page gives current consensus expectations on certain coupons and vintages for 30-year Fannie Mae and Ginnie Mae MBS.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.