Mortgage spreads moved tighter over the Wednesday-to-Wednesday period. For example, 30-year Fannie Mae discount and cusp coupons moved in two to four basis points while 7.5s and 8s were in 12 basis points and eight basis points, respectively. In 15s, spreads were tighter by one to two basis points in 5.5s through 6.5s, and five basis points in 7s. The tightening came on the back of strong buying from money managers, arb accounts, banks and insurance companies. At the same time, originator selling was fairly strong last week at over $5 billion; however, it was easily absorbed.
While the MBS sector is considered to be a tad rich, other factors continue to favor overweighting the sector. These include excellent carry, declining volatility, a rangebound market, declining supply amidst strong demand, the CMO bid, ongoing credit issues in the corporate sector that is encouraging cross-over buying, and the need to reinvest the high level of paydowns.