Mortgages experienced steady two-way flows most of last week, with spreads over the week tighter, despite the neutral to negative bias on the sector and higher risks at current interest rate levels and increased volatility. There was an up-in-coupon preference due to carry; however, lower coupons also did well for investors seeking convexity. Originator selling has picked up and is averaging close to $1.5 billion per day, mostly in 30-year 5.5s.

At current levels and market conditions, support for mortgages is limited. Analysts expect mortgage spreads to hold if interest rates back up, and to widen in a rally. And while there is plenty of cash available for investment, there are better convexity opportunities in CMBS and ABS right now, said JPMorgan Securities. The market is waiting for a catalyst to provide direction and that will be the employment report due out Sept. 3.

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