Election uncertainty weighed heavily on market flows last week, as expectations of an announcement from Florida by press time looked doubtful.
In addition, other states that had relatively close results that went to Gore were starting to tally their absentee ballots last Thursday, which is supposedly narrowing the difference. Additionally, the potential legal actions by the Gore camp also weighed heavily on the financial markets, as a sense of uncertainty and a bit of the November doldrums took over the MBS world.
"Mortgages never do much in November anyway," said an MBS trader. "And it is so hard to focus with all of this going on with the election. Very little has been happening this week."
Later in the week, mortgage originators were in selling, which dragged the market down; however, the spread widening brought in some buyers. Near close last Thursday, 30s were underperforming by 1.2 ticks and 15s by 2.7 ticks, using effective duration hedge ratios.
Spreads were little changed from earlier in the day with 8s and lower three basis points wider and higher coupons out four to five basis points. Mortgages seemed to be the losers late last week, trailing agencies and corporates, which were one to two basis points weaker on the day last Thursday, and swaps, which were essentially unchanged.
The Treasury strength brought on by the equity market decline elicited a flight to quality, the buyback and some short coverage, as well as an above-average originator selling.
While there has been better interest in down-in-coupons, the swap received support late last week from Freddie Mac's mortgage rate survey, which showed a modest increase in mortgage rates over the past week.
In commercial mortgage-backed securities, Salomon Smith Barney and Credit Suisse First Boston were premarketing a $250 million Prudential/Heritage deal that is expected to price late this week.
Also last Thursday, there was a CMBS IO bid list totaling $1.03 billion. The list consisted of several bonds, including a PNCMA bond for $261 million with price guidance of 385 over Treasurys, as well as a GMACC bond for $257 million, with guidance at 370 over Treasurys.
Regulatory Update
Congress is set to return this week to take care of unfinished business before breaking for the remainder of the year.
The next Congress will see some new faces in Committee Chairs, including the House Banking Committee. Since the Republican party held to a slim majority in the House, it appears Rep. Roukema will head it up unless Rep. Baker musters enough support.
Rep. Roukema has seniority in her favor, as well as gender, according to market obeservers. However, she has a reputation for being a lightweight on complicated issues and is not considered a major player in Republican party politics.
However, she is said to have a strong grasp of banking issues, and actively helped fellow Republicans raise money for their campaigns.
On the regulatory front, several issues remain open for comment. OFHEO has published a notice in the Federal Register for comments on its study on examining the risk which Fannie Mae and Freddie Mac pose to the financial system and the housing market.
The comment period lasts through December 29. Also out for comment through December 26 is a proposal by the bank regulators requiring banks and thrifts to hold $1 of capital for every $1 of subprime residuals. The proposal would limit the concentration of residuals to 25% of Tier 1 capital.
