Mortgage spreads widened last week with the cusp coupons weakening 10-12 basis points and the wings moving out six to eight basis points. The weakness stemmed mostly from limited buying interest as the previous week saw strong month end buying. On top of that, the mortgage sector recorded an excellent first quarter performance. According to Lehman Brothers, MBS has generated 114 basis points nominal year-to-date return and 155 basis points excess return.
On top of the buying pause, originator selling was heavy at the beginning of the week with about $2 billion on Monday. Mortgage bankers came with limited supply over the remainder of the week, however. With mortgage rates higher, the Street believes pipelines are fairly light and expect production to wane in the weeks ahead. This outlook bodes well for the sector as demand remains strong, the carry is excellent, and based on recent comments from Fed officials, rates look to be rangebound.