Many market players agreed that Middle East tensions and turmoil colored the tenor of the financial realm last week, leading to mortgages underperforming for most of the week.

Near close last Thursday, 30s were underperforming by four ticks and 15s by seven ticks. Using empirical durations, however, underperformance was less dramatic, trailing by 1.7 ticks.

Thirty-year mortgage spreads ended the day three to four basis points wider in 6s and 8s and out seven basis points and more for higher coupons. Fifteens, which had been two basis points weaker in the morning session last Thursday, were out an additional four to five basis points.

Activity, for the most part, was relatively light throughout the spread sectors on the uncertaintly created by the Israeli-Palestine conflict, further exacerbated by the bombing on an American warship.

While the flight-to-quality bid is on, interest in the mortgage-related sectors will be limited, sources say. The further cheapening in the sector, however, is just making it more attractive for when the market settles down, sources said

"The Mid-east is driving things this week," said one MBS researcher. "Everything is wider. The trade has really been driven by credit spreads, which has been driven by stocks, and I think that a lot of what has been going in stocks has been driven by earnings type of stuff, which is related to oil, and that is related to the Middle East."

On the week, mortgages were wider, and concern about corporate issuance added to the widening.

"But it's clearly driven by what's happening to stocks, because every time the stock market gets crushed, Treasurys rally and mortgages lag," a source noted.

The trend of collateralized mortgage obligation issuance has also somewhat subsided, sources said, and some players mentioned that they believed it was more of a "quarter-end" phenomenon.

"You may see some stuff coming up now but I think a lot of the flood of it in the last week, in September, was related to quarter-end," a trader said. "You've actually seen some decent activity in CMOs because I think CMOs are cheap, relative to 15-years and other papers. You can buy CMOs and create passthrough positions much cheaper than you could in the passthroughs market, so if you're willing to deal with the illiquidity of CMOs relative to passthrough you can get some great bargains."

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