Mortgages saw steady two-way flows last week with interest coming from a wide range of investors including money managers, servicers, hedge funds, and overseas accounts. There was slightly better interest in moving down in coupon as a result of some strength in Treasurys as well as curve flattening. However, 30-year 6s did stage a comeback after getting hit during the roll period. Originator selling picked up slightly with a couple of sessions seeing $1.5 billion in supply coming in 5s, 5.5s and 6s.

Over the week ending Nov. 17, spreads were unchanged in 30-year FNMA 5s and 6s, and one to two basis points tighter in 4.5s and 5.5s. In 15s, spreads firmed one basis point in 4s, and held unchanged in 4.5s and 5s.

Mortgage flows are expected to remain directional to the market. In comments last week from Countrywide Securities, analysts are mostly positive on the sector, noting that demand is solid while supply is limited. They do sound a little bit of an alarm that with more interest rate hikes on the horizon, the market may begin to really feel the effects of a flattening curve at some point. Meanwhile, UBS holds with its neutral recommendation on the mortgage basis. Analysts note that mortgages are rich, but supply is limited and the sector has been seeing good foreign support. Due in part to the falling supply in fixed agency MBS, Bear Stearns believes spreads can continue tightening into year-end, and so it moved from neutral to slightly long on mortgage spreads.

BMA reports MBS issuance down

The Bond Market Association recently released its quarterly report on U.S. bond issuance. Over the nine-month period ending Sept. 30, bond issuance totaled $4.22 trillion, a 22% decline from the same period a year ago, due primarily to the decline in MBS issuance. Excluding MBS, TBMA said issuance was down less than 1%. Bond issuance during the third quarter totaled $1.24 trillion versus $1.45 trillion in the third quarter of last year.

For 3Q04, mortgage-related security issuance amounted to $407 billion, down from second quarter's $539 billion, but comparable to the first quarter. For the first nine months of 2004, issuance totals $1.35 trillion, 46% lower than a year ago. New issuance of agency MBS fell to $803 billion for the first nine months of 2004, from $1.74 trillion for the same period 2003. For the third quarter alone, issuance declined nearly 32% from the second quarter to $223 billion.

By type, Fannie Mae issuance through September hit $413 billion, down nearly 59% from the first nine months of 2003. Freddie Mac issuance meanwhile is off nearly 50% to $285 billion, and Ginnie Mae issuance is down 40% to $103 billion.

Agency CMO new issue activity decreased to $275 billion in the first three quarters, said TBMA, compared to $518 billion a year ago. Issuance during the 3Q04 totaled $82 billion versus $109 billion in 2Q04.

TBMA also noted that average daily trading volume in agency MBS by primary dealers slipped 6% to $205 billion in the first nine months compared to $219 billion for the same period 2003.

Refi application activity jumps 11%

Mortgage application activity rose on a seasonally adjusted basis for the week ending Nov. 12, according to the Mortgage Bankers Association. The Purchase Index held essentially unchanged at 480 versus 483 the previous week, while the Refinance Index jumped nearly 11% to 2375. The data was given a half-day adjustment for the Veterans Day holiday despite the fact most mortgage lenders were open. On an unadjusted basis, purchases fell 13% to 389, while refinancings were little changed at 2138 versus 2149 in the previous week. The report was in-line with Countrywide's expectations.

As a percentage of total application activity, refinancings jumped to 48.6% from 45.2% and ARM share fell to 34.0% from 35.3%.

Mortgage rates little changed on week

Mortgage rates held steady last week, according to Freddie Mac's latest survey with the 30-year fixed rate mortgage rate averaging 5.74%, down two basis points from the previous week. The 15-year fixed rate was reported at 5.15% versus 5.16% previously, and the one-year ARM rate rose one basis point to 4.17%.

Looking ahead to the next MBA mortgage application report, JPMorgan Securities predicts the Refinance Index will decline marginally to the 2200 area from 2375. This would be little changed from the unadjusted number. Looking through to year-end, JPMorgan anticipates activity to drop off as the holidays take center stage. Analysts predict the Refi Index will fall to the mid-1000s by year-end.

As far as the prepayment outlook goes, speeds are expected to hold little changed in the next couple of reports, and then slow 10% to 15% in January.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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