Last week saw reversal from the heavy originator selling and profit-taking that was seen in the previous week.

The widening in spreads encouraged investors, especially money managers, to begin adding positions again. At the same time, originator selling was relatively light at $1 billion or less per day. As a result of the better buying, spreads moved in noticeably over the week. From Wednesday, Jan. 16, to Wednesday, Jan. 23, spreads on 30-year Fannie Mae 6% through 7% coupons tightened seven to nine basis points; and 7.5s and 8s were 12 and 16 basis points firmer, respectively. Fifteen-year MBS moved in six to seven basis points as investors took notice of the sector's lagging versus 30-year MBS on recent heavy supply.

This week, flows in the sector will be impacted by month-end extension activity; and looming next week, Thursday, Feb. 7, is the housing agencies' January prepayment reports.

MBA Refi Index soars

Not unexpected, the drop in mortgage rates to 6.83% for the week ending Jan. 18 sent mortgage application activity soaring.

The MBA's Refi Index jumped 43% to 2768, and the Purchase Index rose nearly 7% to 372. Since late December when the Refi Index hit a low of 1285, it has rebounded 115%. At this time, the Street expects prepayment speeds to record modest gains of 10-20% in March after declines in January and February; however, with the jump, speeds may increase slightly more than is currently projected, particularly in premium coupons.

Freddie Mac announced that fixed mortgage rates backed up 13 basis points for the week ending January 25. The 30-year fixed mortgage rate stands at 6.96% and the 15-year fixed mortgage rate is at 6.44%. One-year ARM rates were little changed at 5.10% versus 5.08% in the previous release.

With mortgage rates higher, the Refi Index is expected to be slightly lower this week, says Salomon Smith Barney. Lehman also notes that at current mortgage rates they predict the index to stabilize at around the 2300 level.

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