The risk on trade that began October 5 continued this week with the 10-year note yield at over 2.20% into mid-day on Friday from 1.783% as of the close of October 4.

Unlike last week, however, mortgage banker selling was modestly lower as originator pipelines cleared. Supply averaged $1.8 billion per day with 4.0% coupons making up the majority compared to $2.1 billion in mostly 3.5%s previously.

Meanwhile, the Fed remained at an average $1.3 billion per day in production coupons. With supply lower and the Fed steady, the supply/demand dynamic improved with the Fed covering 72% of daily supply compared to 56% previously.

On the private investor side, the lower prices on Tuesday and into mid-day on Wednesday drew in active buying from banks, money managers, insurance companies, REITs, and hedge funds - primarily in production coupons, but also in 5% through 6.0% coupons. Real money and hedge fund profit taking and late day supply showed up Wednesday afternoon through Thursday as some risk aversion returned on concerns related to bank earnings and the EU.

The optimistic tone was back on Friday with equities firmer on favorable earnings and economic news, along with positive expectations on the EU. Despite the lower prices, MBS investors were not too active with better selling overall and supply on track to hit the upper end of this week's $1.5 to $2.0 billion range. A buy/sell ratio of around 4:1 seen earlier in the week turned to 1:3 by the latter part.

In other mortgage activity, GN/FNs were higher over the week and back near their highs with overseas interest in Ginnies on the higher yields; GD/FNs remained mostly lower on Treasury selling more Golds than Fannies and lack of CMO activity, while 15s mostly lagged 30s, though Friday 15/30s were higher. Specified pool trading was active and two-way with yield based buying noted mid-week, while higher prices on Thursday led to better selling from REITs, money managers and hedge funds, along with Treasury.

For the holiday-shortened week, MBS volume through Thursday averaged 100%, down from 128% last week. Performance improved into positive territory over the week with Barclays Capital's MBS Index outperforming Treasuries by 10 basis points month to date through October 13. The sector was leading ABS (-16 basis points) and CMBS (-73 basis points), but lagging Corporates (+50 basis points). The 30yr Current Coupon yield increased to the 3.30% area from the 3.20% area and lower previously. The spread to 10yr notes tightened to +113bps from +120 last Friday and to +96bps/10yr swaps from +100.

Fed MBS Purchases

From October 6 through 12, the Fed bought $5.2 billion in Agency MBS, which equates to a daily average of $1.3 billion. Since the October 3rd inception, the Fed has bought a total of $9.15 billion of which 89.1% has been in 30-years (53% in 3.5s and 36.1% in 4s), and 10.9% in 15s. 35% has been in Freddies, 51% in Fannies and 14% in Ginnie Is and IIs.

For the period October 14 through November 10, the Fed tentatively plans to purchase $22 billion of agency MBS, which equates to $1.1 billion per day, down from the $1.3 billion per day average experienced since inception.

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