Mortgages experienced solid two-way flows last week. Originators were relatively heavy, coming with $5 billion plus into the market. This was offset by active buying from CMO desks, money managers, arb accounts, and banks. Indexers were also active in Wednesday and Thursday's trading sessions. For the month of February, the MBS Index extended 0.16 years, about twice as normal.

Through mid-week, spreads on 30-year 6s through 7s were two-to-three basis points tighter, while higher coupons were slightly wider on heightened prepayment concerns. 15-year MBS, which have been generally neglected, saw increased buying interest. Spreads moved in two-to-three basis points in 5.5s through 6.5s, and were one basis point firmer in higher coupons.

In other news last week, the Mortgage Bankers Association announced that its Refi Index was essentially unchanged at 1922 versus 1928 the previous week on a seasonally adjusted basis. Unadjusted the index declined 10% to 1729. In comments, Salomon Smith Barney said that with rates down modestly over the period, the holiday adjustment may be too small. If that is the case, they expect the Refi Index to remain at current levels in this week's report as rates have increased slightly. The MBA also reported that its Purchase Index rose 8.7% to 315.5.

Freddie Mac announced that mortgage rates were virtually unchanged during the week ending March 1. The 30-year fixed mortgage rate fell one basis point to 6.80%, the 15-year fixed mortgage rate was unchanged at 6.28%, as was the 1-year ARM rate at 4.96%.

Prepayment Outlook

On Thursday, March 7, the housing agencies release prepayment data for the month of February. Based on the back up in mortgage rates and holiday related slowing in November and December, the reports are expected to show further slowing from January's levels. Conventional 6.5% coupons are expected to show the largest decline at between 25-35%.

Ginnie Maes are predicted to show more moderate slowing versus conventionals. In part, this is related to the longer time it took to refinance FHA loans. Looking to the March reports, speeds are expected to increase around 10%.

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