The week was marked by several volatile trading sessions as Treasury yields surged back to near 5.0% after dipping to 4.68% in the early part of the week. Treasurys sank on better-than-expected economic news last week. The sell-off was further exacerbated by selling from mortgage players in order to shed duration. This entered into the mortgage arena as well with heavy selling of $3-4 billion, primarily in 6s and 6.5s.

Originators, which had been relatively quiet, came back with a vengeance mid-week. Amid all the selling from investors, mortgage bankers added $2-4 billion into the fray, also mostly in 6s and 6.5s.

Investor activity was mixed. Money managers took advantage of cheaper levels, while arb accounts added versus swaps. Banks, on the other hand, took profits. Mortgage OAS's widened over the week. For example, Fannie Mae 30-year 6.5% and 7.0% MBS weakened five to seven basis points while 7.5s and 8s were 10 basis points wider. Over the same period, swaps and agency spreads ranged from plus one to minus two basis points.

Overall, the street is neutral to overweight the sector. The longer-term outlook for the sector is generally favorable on expectations of declining volatility. Near term, spreads are seen as very attractive.

MBA Refi Index

Plunges 29%

The increase in mortgage rates finally caught up with the MBA's Refi Index. For the week ending November 30, the index dropped to 3041 from 4284. The percentage of refinancing applications to total applications declined to 65% from 73% in the previous week. During this week, the 30-year fixed rate mortgage rate jumped above 7.0% to 7.02% for the first time since late July/early August.

For the week ending December 7, mortgage rates reversed due to the decline in yields from November 29 through December 4. According to Freddie Mac's Primary Mortgage Market Survey, the 30-year fixed rate mortgage dropped 18 basis points to 6.84%; the 15-year fixed rate declined 23 basis points to 6.30%; and the 1-year ARM rate was essentially unchanged at 5.21% versus 5.22% in the previous week.

With yields back up, the brief decline in mortgage rates is not expected to have too much of an impact on the MBA's Refi Index. At this time, Credit Suisse First Boston is predicting the index to decline to the mid/low 2000 level in the next couple of weeks.


The housing agencies released prepayments for November on Friday, December 7, too late to be included in this week's edition of Asset Securitization Report. Speeds are expected to show substantial increases from October. Further gains, though smaller percentage increases, are expected through January. Speeds are expected to slow 10-30% in February following the increase in rates through November.

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