Mortgages struggled again last week despite significant cheapening in the last few weeks. In addition to the rate levels bringing servicer selling and extension risk into the equation, the sector is suffering under strong supply, full dealer inventories, special Treasury repos, and unattractive carry. Until the market stabilizes, it appears overseas support will be minimal.

Servicers remained steady sellers throughout last week with selling focused on the move up from 5s into 6s. Originator activity was mostly uneventful, although selling reportedly was strong Thursday as the 10-year Treasury lost 12/32 to yield 4.65%. Supply during the week was mostly in 5.5s. Hedge funds were also better sellers. There was some real money popping up from time to time to take advantage of the cheapening. Investors, however, are currently very sensitive to a further rate back up, and are proceeding cautiously.

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