The directionality of mortgages was very apparent last week with the market moving up and down in response to perceptions about future Federal Reserve action and the economic data. Monday experienced better selling from real and fast money as the market traded lower, but this was reversed on Tuesday with strong buying from overseas, money managers, and servicers as the market rallied strongly with the 10-year Treasury yield falling to 4.70% from Monday's 4.77% close. Profit-taking from money managers showed up on Wednesday as the market traded lower, leading mortgages to underperform. In early trading Thursday, the 10-year yield had rallied six basis points - in part on favorable economic news and a flight to quality bid related to the bombing in Iraq- and mortgages were strongly outperforming.

Flows were concentrated in 5s through 6s and influenced by shifts in the curve shape, though FNMA 5.5s caught strong interest early in the week on expectations of large mega pool creation that was also causing the roll to heat up. The report was issued Wednesday afternoon showing the creation of two pools: 745412 for $1 billion and 745418 for $12 billion. The roll was trading at 3.625 before the report but had declined to 3.25 Thursday morning. It is not expected to trade below 3, according to one trader.

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