From Aug. 14 through Aug. 16, the MBS Index added 12 basis points in excess return versus Treasurys as the market rallied sharply following the better-than-expected inflation reports, according to Lehman Brothers. Month-to-date through Aug. 16, the MBS Index is up 27 basis points. Meanwhile, year-to-date, mortgages have outperformed by 79 basis points. For all of 2005, mortgages underperformed by 37 basis points.

Last week saw substantial buying in MBS from a wide range of investors, including Asian buyers who finally showed up on Wednesday. Buying on Tuesday and Wednesday was said to offset selling by a ratio of 3:1. In particular, servicers were actively selling 6.5s to move down in coupon, specifically 5s, to add duration.

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