Mortgages put in a good performance last week aided by better technicals, low volatility and generally tighter swap spreads. According to Lehman Brothers, the MBS Index is up 25 basis points month-to-date. This brings the year-to-date performance to 85 basis points over Treasurys, back to its highest level of the year reached at the end of February.
There was widespread buying participation from money managers, servicers, Asian investors and others - directed mostly down in coupon - with the 10-year yield holding close to the 4.80% level on mixed economic data. Specifically, the inflation reports, housing starts and the National Association of Home Builder's Housing Market Index (HMI) numbers support the continuation of the Federal Reserve pause for the foreseeable future. Furthermore, the Federal Reserve's focus will remain inflation based on the annualized CPI number. Meanwhile, originator selling - which had averaged nearly $2 billion per day last week - fell back to its normal area of $1 billion a day and less. Flows, however, were down from the previous week given the narrow range in which the market was trading and on the tightening in spreads. Asian investors were quieting down in the latter half of the week. Better participation is expected from that group if the market backs up modestly from current levels. However, the outlook for overseas buying is favorable with the record sized trade deficit as well as data from the TIC flows report that has shown good buying from foreign accounts.