Last week was a wild one in mortgage-backeds, as the fixed income markets were held hostage to equities. Over the Wednesday-to-Wednesday period, the 10-year Treasury yield dropped nearly 30 basis points to around 4.42% as of mid-day Thursday. With the strong flight to quality bid, mortgages lagged with spreads widening about 16 basis points on average versus benchmarks.

There was strong buying on the weakening, especially from hedge funds and servicers. Banks were better sellers early in the week on profit taking, in part to buy back equity; and CMO dealers were active, particularly in 15-year 5.5s. Many investors, however, are becoming increasingly premium resistant with the average mortgage price at over $103.

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