Mortgage flows started off on the quiet side last week as the market waited for the Fed's economic commentary. Activity picked up shortly after, as the market rallied on the favorable wording: "policy accommodation can be maintained for a considerable period." In comments from Lehman Brothers' economists, they believe the Fed will hold rates unchanged through 2004 "as the ongoing recovery takes a long time to close the output gap and inflation remains subdued." The lower coupons benefited from the news due to carry and curve steepening.

Mortgages continued to tighten in early trading on Thursday as the market sold off following the stronger-than-expected third quarter GDP report. Technicals are supporting the market as originator selling has averaged about $1 billion per day. In addition, the week saw some month-end buying from indexers. According to Lehman, the MBS Index is expected to extend 0.24 years in October. While down from the 0.30- and 0.36-year extensions seen this summer, it is still large by historical standards. Other sectors are predicted to show more moderate lengthening. For example, the Treasury Index is anticipated to gain just 0.01 years, the Agency Index 0.02 years, and the Credit Index 0.07 years. Overall, the Aggregate Index is forecast to rise 0.11 years.

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