October was a good month for the mortgage sector. According to Lehman Brothers, the MBS Index gained 25 basis points in excess return versus Treasurys. Year-to-date, mortgages have outperformed by 86 basis points. So far, this year is turning into a "very good year" for the sector versus last year where the MBS Index underperformed by 37 basis points.

Last week, mortgages held up fairly well despite a sizeable rally that knocked the 10-year Treasury yield down to 4.57% at mid-day on Wednesday from 4.68% as of the close of Friday, Oct. 27, leading to a slight uptick in volatility. In Tuesday's session, the weaker than expected Chicago PMI and Consumer Confidence numbers rallied the market further from the previous week's gains, and on Wednesday additional gains were being made as a result of weak construction and ISM Index numbers.

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