After a slow start to the New Year, mortgages were on fire last week. Spreads on 30-year Fannie Mae 4.5s were six basis points tighter; 5s were in nine basis points; 5.5s and 6s were each five basis points tighter; and 6.5s were unchanged. In 15s, spreads were three to four basis points firmer in 4s through 5.5s, with the exception of 4.5s, which tightened eight basis points.

The sector was well supported by real money and relative value accounts. The investors felt confident with the market holding range bound, volatility remaining low and limited supply, as originators last week averaged less than $1 billion per day. As the spreads illustrate, the trend was down in coupon, due in part to curve flattening; however, higher coupons recovered after getting hit following the collapse of the Fannie 6 roll in the first week of the year. At the same time, 5.5 rolls have strengthened a bit, according to JPMorgan Securities. In recent research, analysts noted that last month there was around $8 billion of FNMA 5.5 large mega pools created. While there was more than enough supply available, JPMorgan analysts are concerned that recent performance suggests there may be similarly larger purchases for January. Based on what happened to 6s last year, there is concern that the 5.5 roll may become special.

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