Both gross and net agency MBS issuance dropped substantially in October to $86.8 billion and $6.6 billion, respectively, compared to $123 billion and $51 billion in September — and September was the lightest levels for both since February of this year.

November is also looking to be very light again with month-to-date gross at $48 billion halfway through the month, and the looming Thanksgiving holiday should keep issuance limited in the latter half. With paydowns estimated at $86 billion, this month is on track to be flat to negative in terms of net issuance.

While the Federal Reserve has been slowing its pace of buying, their behavior suggests between $85 billion and $100 billion in purchases are likely for the remainder of the year. With this kind of supply-demand dynamic, the outlook for spreads seems favorable.

In research, BNP Paribas analysts said they expect mortgage will grind tighter into the end of this year for this reason.

While spreads are tighter, they believe there is still considerable room for additional tightening "before reaching all-time tights," analysts said. They also do not anticipate that interest rates will make a significant move higher as "year-end is more likely to bring stress than relief to the market," they said.

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