Mortgage performance was improving through midweek, and a major factor for this was the decline in supply compared with the previous week. Originator selling averaged $1.5 billion, down from the daily drops of $3 to $4 billion from the previous week. Supply has been around 75% on 5% coupons and 25% on 4.5s.

Overall MBS volume into last Wednesday was running at about average. Flows were two-way and focused as low as 4% coupons to 6.5%. Interest was focused mostly down-in-coupon with servicers and real money large supporters in 4.5s and 5s. Investors such as foreign central banks and relative value were seen in up-in-coupon trades, while money managers were noted to be two-way in 5.5s through 6.5s. Banks and hedge funds took profits at the improved prices resulting from a strong flight to quality early in the week.

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