Mortgages saw moderate two-way flows last week by a wide range of investors - though fast money was the most dominant player - that kept spreads in a narrow range. At the same time, supply remains at near the $1 billion per session area, and is mostly concentrated in 5.5s. As long as rates hold relatively stable, mortgages are expected to grind tighter, however, sharp moves in either direction are likely to send spreads wider.

The story in the market last week was the continued strength in the FNMA 5 roll due to the strong Mega production in April. While it appears as if there is no available supply in 2005 FNMA 5s, according to JPMorgan Securities, this is not really the case. When the Megas are decomposed into their underlying pools and WALA distribution obtained, JPMorgan says it is apparent that there is a sharp rise in supply for WALAs between 10 and 12. In fact, analysts report it seems there is sufficient supply under 10 WALA to cover shorts, suggesting the roll may be overvalued.

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