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.

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