The new year seems to have gotten off to a much slower start for residential mortgage-backed securities than was anticipated, implying that the market might have been premature in predicting that it would spring back to its usual self in a short period of time.

"People are scratching their heads a little bit, still waiting for the banks to come in," said one MBS trader that was perplexed by how slow the week was. "People think that bank demand is a given, but to a certain extent, it has not materialized."

"There is simply not a big flow of new transactions," said Michael Hoeh, head portfolio manager at Dreyfus Corp. "Originations were down so much that people cancelled deals. The supply is much lower than was anticipated for the start of the new year."

By the end of the week, the spread between the 30-year Fannie Mae 8% issue and the Treasury grew to 145 basis points over, after shrinking 11 basis points so far this year. Current coupons are in the area of 125 to 130 over, but that is considered very tight for by observers.

"There was a lot of tightening in December, and there was this notion that great demand in January became a given, and when that happens it tends to be a buy the rumor, sell the news' situation. But it's tough to make value arguments for a lot of sectors," said the MBS trader.

Some market participants see good value in long whole-loan paper, but in general, PAC spreads are tight, and collateral, in general is very tight.

"The only other sector is the 20-year sector, but 15-year paper is so rich that 20's don't look very attractive either," said another MBS trader. "Fifteen-year paper is absurd and has been for awhile, but real account demand is just not there at these levels."

The same seems to be true for collateralized mortgage obligation demand.

"There is this notion that since supply is low there's going to be a tremendous amount of activity in jumbo product," a source said. "Some of the spreads have gotten ahead of themselves. Some of the back-end paper is cheap, and the front-end is very rich, but you need bank participation and these guys are not just buyers at any price.

"The Street front-ran the market a great deal, anticipating demand in January, and spreads are just too tight for some people."

JPM Conduit Slated for January

On the commercial side of the market J.P. Morgan & Co. was said to have put the reds out for its $813 million J.P. Morgan/LaSalle conduit. The transaction was almost brought to market in the third week of December, but the company decided to postpone it.

Other January deals expected include a $1 billion Deutsche Bank Alex. Brown floating-rate offering, a Prudential/Residential Funding Corporation deal for $900 million and a $900 million Wells Fargo/Bear Stearns/Morgan Stanley transaction.

"Dealers want to appear mightier than the reality would sometimes allow," said Michael Youngblood, the managing director of real estate at Banc of America Securities. "Technicals are looking very good for CMBS, in fact we had had trading at current levels and participation in December, but then everything faded at year-end, but we picked right back up at that intensity already.

"These early conduit deals from better-quality originators, which have had a long time to be underwritten, will likely be very well received and should price on the market. In fact, we think there will be very little difference between the JP and the Wells deal," Youngblood added.

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