More than $1 billion in heavy originator selling characterized last week's MBS trading environment, leading to mortgages underperforming late in the week. The drop in equities finally moved bonds higher, traders said, and with 6.5% bonds moving above par, the mortgage sector is faced with potential heavy convexity buying and even more prepayment risk.

In fact, part of last week's Treasury gains were due to convexity hedging by mortgage players. Near close last Thursday, 30-year MBS were underperforming by two ticks, with discounts leading the way at five ticks. Premium coupons were essentially flat. Fifteen-year discounts, however, saw better interest, which helped that sector turn in a flat performance for last Thursday.

One trader noted that the Street generally favors 15s on a better prepayment profile and less supply risk. Spreads remained four to five basis points wider by the end of the week.

Perhaps the biggest news for MBS last week was the dip lower in 30-year fixed mortgage rates to 6.89%, down from 6.96% last week. Mortgage rates have held below 7% for three weeks in a row now, and while the MBA's Refi Index has dipped 20% in the past two weeks, it is expected to reverse course substantially this week. It was widely anticipated that the Fed would lower rates at its March 20 FOMC meeting, which probably encouraged potential refinancers to wait.

Given this continued decline in mortgage rates, large gains are predicted to occur when the Refi Index is reported this coming Wednesday. Salomon Smith Barney says that while a 3000 level sounds too high, a big pick-up seems reasonable given that the market has hit new mortgage-rate lows for this rally.

Given the recent lull in mortgage applications, prepayments may see a leveling off in the April report, before hitting new peaks possibly by the May report.

Also last week, Fannie Mae priced its $10 billion in benchmark notes, split between three- and ten-year maturities. The two-part deal priced with the following details: The $5 billion threes came at $99.947 to yield 4.77% for a spread of +57 bps, while the $5 billion 10s priced at $99.382 to yield 5.582% for a spread of +82 bps. The 10s came a basis point or so in back of talk while the threes were right in line with initial talk. Modest selling did accompany the deal but it's hard to say if it was directly associated to the pricing rather than to the bounce in equities. The issue met with strong demand, sources said.

Nomura Securities priced an innovative Ginnie Mae-guaranteed project loan multifamily securitization deal last week for $291 million, co-led by Merrill Lynch and Utendahl Capital Partners. The deal, Ginnie Mae REMIC Trust 2001-12, is backed by 71 underlying project loan certificates, which in turn relate to 71 project loans across the country. This is the first time that project loan certificates have been re-packaged into Remic securities that carry a "full faith and credit" guarantee from the U.S. government.

CMBS Roundup

In other activity, the CMBS market is ready to take off. First Union's $1.2 billion deal priced late last Thursday. Word on the Street is that the deal went very well, keeping pricing spreads within the price talk range for the triple-A through A-rated classes.

The First Union deal will be followed by the $889 million PNC issue this Monday or Tuesday, sources said. Also, the $1 billion GMAC issue that is currently premarketing is planned for March business.

The CMBS sector has also been busy with bid lists. Last Thursday saw two IO lists totaling $1.3 billion, in addition another small list, $20 million GMACC 1998 C2 A1. The tranche is rated AAA and has a weighted average life (WAL) of 3.9 years.

Also last week, a triple-A CMO list circulated. It consisted of seven bonds with a WAC of 6.75% and WAL of 3.7 years. Current face value totaled $203.8 million and was talked at 193 basis points to 219 basis points.

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