The strong start to the New Year is continuing in mortgages, though Tuesday last week did see a heavy sell-off that raised questions of whether the tone had shifted. Mortgage flows were strong and two-way. Monday got the week off to a good start as December paydowns -totaling over $40 billion - were reinvested. The strong gains encouraged profit-taking as the day progressed and it picked up steam on Tuesday with real and fast money as well as servicers jumping in with the strong sell-off in Treasurys due to heavy corporate supply and mortgage-related selling. This brought fears that maybe the positive tone in mortgages since the start of the year had shifted, but the cheapening led to active buying on Wednesday as the market held stable, particularly from servicers adding duration and from overseas. The buying was continuing into Thursday's session with central bank and fast money support. The early year and week flows were up in coupon, but that shifted down in coupon following Tuesday's sell-off.
Originator selling continues to be uneventful with supply averaging less than $1 billion per day. Also supportive for mortgages has been the continued low vol environment. The near- term outlook remains favorable. In midweek comments, JPMorgan Securities analysts are holding with their tactical overweight due to lower vol, firming rolls and overseas buying -which they believe should help support the near-term tightening. They also don't expect a turnaround before February. UBS remains a modest overweight on the mortgage basis. They expect foreign and crossover buying should offset the increase in net supply.