Mortgage flows picked up last week with steady buying seen primarily from money managers, and a bit of interest from the banks as well. At the same time, originator supply remained light with selling averaging around $1 billion per day. In addition to the favorable technicals that supported mortgages, the sector benefited from Treasury supply, falling volatility, and roll-related trading resulting from the calendar flip on 30-year conventional MBS. The 5% coupons, in particular, benefited. Rolls on 5s richened considerably and were trading just above fail on Thursday, the beginning of 48-hour notification. With the front-month supply in Fannie Mae 5s at over $130 billion net of CMOs, and expected to rise to $160 billion next month, 5s should lose "specialness," according to JPMorgan Securities.

Overall, the rally in rates last week benefited the lower coupons in both the 30- and 15-year sectors. Meanwhile, 30-year Fannie Mae 5% coupons tightened eight basis points over the Wednesday-to-Wednesday period, 5.5s moved in two basis points, and Dwarf 4.5s were firmer by five basis points. Other coupons in both sectors were wider.

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