Mortgages were on hold until late last Tuesday afternoon as the market waited for Fed Chairman Alan Greenspan's semiannual report to Congress. The Treasury market rapidly sold off following his comments suggesting that the FOMC was still on track to raise interest rates despite some recent weak economic data. Mortgage buyers, meanwhile, breathed a sigh of relief as convexity risk fell, and immediately jumped in to take advantage of the recent cheapening. Buyers included money managers covering underweights - as the market convexity improved - as well as insurance companies, banks, hedge funds and others.

Initially, higher coupons were targeted as a result of carry. However, 6s also benefited from news about the creation of two Fannie Mae Mega pools that pulled $17 billion off the Street about a month ago. As lower coupons lagged, investors began moving down in coupon, too. One trader reported that on Wednesday afternoon, nearly $1 billion moved down in coupon from 6s to 5s. Servicers were also active in 5s and 5.5s. Activity slowed down on Thursday as investors took a breather following the mid-week activity. Given the recent gains, there is the prospect of some profit taking; however, with limited supply, backups in the basis will be shallow, another trader said. In addition, if the selling is accompanied by higher yields, real money buyers will be there to take advantage of the opportunity.

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