Mortgages were pressured last week by better selling, higher volatility, and jitters about convexity hedging. Mortgages' September performance has now dropped into negative territory, according to Lehman Brothers data. Month-to-date through Wednesday, Sept. 27, the MBS Index was down five basis points versus Treasurys.

Servicers were active last week in the mortgage market. Initial flows were down in coupon as the market rallied on Monday on the weak existing home sales report. Later in the week as the market backed up, servicers were adding duration with 5.5s and 6s. As market yields have declined below 4.60% on the 10-year Treasury, there has been increasing talk regarding convexity hedging. Analysts, however, peg around 4.30% on the 10-year for a noticeable pick-up in buying from servicers.

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