Last week was an interesting week in mortgages to say the least. Monday saw active buying all across the coupon stack following the larger-than-expected decline in prepayments. Higher coupons, in particular, experienced the greatest gains as a result of the prepayment report.

The environment changed Tuesday when the market rallied, bringing the 10-year Treasury to 4.02%. It was even uglier on Wednesday when the 10-year closed at 3.98% following a favorable five-year auction. Profit taking emerged, volatility moved higher, and buyers moved to the sidelines on concerns about potential supply and refinancings as mortgage rates moved below 5.60%. In comments from Bear Stearns' senior managing director Dale Westhoff, he said that for every basis point below 5.60% that mortgage rates decline, $30 billion in agency fixed rate mortgages become refinanceable (see related story p. 15).

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