Last week, mortgages struggled on the return of negative subprime and housing news that led to a flight to quality bid in Treasuries, and a sharp uptick in volatility. Increasingly disturbing news regarding the housing market has increased the odds that the Fed will cut rates 25 basis points at the end of October. Odds are currently 44% of a 25 basis points cut, up from 32% on Wednesday, October 10. Further adding to the market's strength on Wednesday was news that Turkey's parliament had approved moving more troops into northern Iraq. From Friday, October 12, close through mid-day Wednesday, October 17, the 10-year Treasury had rallied 33/32nds, the yield was down 13.3 basis points to 4.552%, the 2-year Treasury note yield had plummeted 23.1 basis points, and the 2s10s curve was steeper by 9.8 basis points to 55.7 basis points.

The market conditions brought out better selling/profit taking in mortgages from real and fast money -focused in 5.5s and 6s, although the widening periodically attracted buying interest. Overseas was mixed, but they took advantage of wider spreads. Originator selling averaged between $1 and $1.5 billion per day in the first half of the week. Supply continues to be primarily in 6% coupons.

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