With the holidays approaching, mortgage volume was below normal overall over the course of the week. Flows were mixed with a supportive tone for a good part of the week that partly resulted from declines in short term rates from ECB and Federal Reserve auctions. On Tuesday, mortgages were buoyed by ECB's $500 million injection. Additionally, the Fed held the first two TAF auctions totaling $55 billion last week. The sharp FTQ rally this week also led to active buying down in coupon with servicers very active, 5.5s were particularly favored. From last Friday's close through yesterday, the yield on the 10-year Treasury fell 20.6 basis points to 4.026%. Asian investors were also a regular buying presence in the market throughout the week with interest also primarily in 5.5s. Other investors -- real money, fast money and leveraged -- were mixed and continued in their "day-trading" modes. There was some profit taking that began to pick up late Thursday and carried over into Friday's morning session as Treasurys sold off sharply and equities rallied on news that Merrill Lynch might have an investor in Temasek Holdings of Singapore. Heavy originator selling was also a factor. In other sectors, flows in GNMAs were on the quiet side resulting in very minor changes in the GNMA/FNMA swap over the week. Activity in specifieds was also light, though there were small bid lists making the rounds as investors do their annual year-end balance sheet clean-ups. In 15/30s, the early part of the week had 15s outperforming, while the latter part of the week was mixed. Over the week, originator selling averaged between $1.75 and $2.0 billion. Supply was largely in 5.5s, and to a smaller extent in 6s. The Mortgage Bankers Association reported a 19.5% decline in mortgage application activity for the week ending Dec. 14. This came on a 27.3% drop in the Refinance Index to 2093.6 and a 10.6% decline in the Purchase Index to 422.2. Meanwhile, 30-year fixed mortgage rates rose just 3 basis points to 6.14% this week. Mortgage rates have backed up 18 basis points in the past two weeks as the market sold off on stronger data. A year ago, the rate was very similar at 6.13%. The 15-year fixed mortgage rates, five-year hybrid ARMs and one-year ARM rates rose just one basis point to 5.79%, 5.51% and 5.90%, respectively. With the holidays, mortgage application activity is seen as sliding further in this week's MBA report. As of the close of Dec.12, net outright positions in MBS jumped $8.5 billion to $54.1 billion. This is the highest inventories have been since the start of this year. With the improvement in mortgage rates and stronger refinancing activity in November, speeds in December are projected to increase around 2% in aggregate on 4.5s through 6.5s. In the month of November, the 30-year fixed mortgage rate averaged 6.20%, according to Freddie Mac, down 15 basis points from October's average. At the same time, the Refinance Index averaged 2343 in November, up nearly 12% from the previous month. Prior expectations had speeds slowing about 7-8% on a lower day count and slower seasonals. The largest increase in speeds is in the 2006 vintages, which are seen increasing around 9% from October. Older vintages are predicted to be mostly flat to 1% to 2% higher. Prepayment peeds are seen slowing 3% to 4% in January and 7% to 10% in February overall, with the less slowing generally in the 2006 vintages.

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