Last week saw active two-way flows both before and after the Federal Open Market Committee's statement. Investors were fairly confident about what the Fed would say and took advantage of the prospect of curve steepening and lower volatility following the announcement. The market was not disappointed as the Fed did exactly as expected. It kept the rate hike to 25 basis points and retained the "measured" language. The Fed did, however, allow that it could become more aggressive if required, though at the moment it doesn't perceive the need. Given the Fed's language and four more meetings left for the year, it would seem the Fed Funds rate would end the year at 2.25%. Many economists, however, predict a 2.0% level giving into 2005.

Also providing a supportive bid for mortgages was the very large extension in the mortgage index for July 1. According to Lehman Brothers, the MBS Index was expected to extend 0.18 years - substantially higher than the historical average of 0.12 years. Meanwhile, Treasurys extended by 0.02 years, agencies contracted by 0.24 years, the Credit Index extended by 0.04 years and the Aggregate extended by 0.04 years. Also beneficial to the mortgage sector were changes in the Lehman Indices. This is the removal of smaller corporate and ABS issues that will slightly increase the mortgage portion of the index by 1.2%.

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