Greece events remained a dominant influence on the markets this week, although it turned out to be the reverse of last week.
Progress on passing austerity measures returned the "risk-on" trade that resulted in a rally in equities at the expense of Treasurys, which were further weighed by $99 billion in supply.
The 10-year notes plunged 79/32nds through Thursday with the yield surging 29 basis points to 3.158%; 2s10s slope steepened over 16 basis points to +269.2.
The sharp drop in prices and increase in yields brought in widespread participation all across the coupon stack, in both 15s and 30s.
Overseas investors, banks, money managers, REITs, hedge funds, real money, and indexers were all buying and were generally focused in 4.5s and 5s. Meanwhile, lower coupons were pressured with better selling, including from servicers, as yields backed up.
GNMA/FNMA swaps continued to shock and awe, climbing higher with the 4.5 and 5.0 swaps moving above two points and closer to a record high due to strong technicals.
Mortgage banker selling averaged $1.6 billion per day, which was little changed from last week, and consisted mostly of 4% coupons. It was quite manageable given the strong demand.
The Treasury Market Practices Group (TMPG) on Wednesday announced revised fails charge recommendations for agency MBS. The revised recommended practice consists of a fails charge equal to the great of 0% and (2% minus the federal funds target rate) and would be applicable to transactions entered into on or after February 1, 2012 and to transactions entered into before that date, but remaining unsettled as of February 1, 2012.
Deutsche Bank Securities MBS analysts said in a report that one impact from the penalty could be higher TBA dollar rolls as pay-up pools are likely to be delivered in the TBA market to avoid the penalty.
Furthermore, specified pool pay-ups will likely come under pressure on the higher rolls. Pay-ups were slightly weaker on the news.
Overall, mortgages put in quite a performance as well in the final week of June, with Barclays Capital's MBS Index recovering from a peak negative position of negative 36 basis points mid-month to close at 40 basis points.
The sector outperformed ABS (nine basis points), CMBS (negative 98 basis points) and corporates (negative 22 basis points). The 30-year CC yield rose to 4.01% as of June 30 from 3.84% as of June 24 and 3.92% as of the end of May.
The spread to10-year notes stood at 85, two basis points tighter from May 31 and at 74 to 10-year swaps, three basis points tighter.
Overall, volume averaged 100% through Thursday, according to Tradeweb, compared with 84% last week.
The latest news on prepayments will be out late afternoon Thursday. Conventional speeds for June are expected to increase around 10% on average with 5s and 4.5s jumping 20% to 30% as they are of higher credit quality and better able to refinance.
GNMA speed gains are more moderate at around 5% as a result of the impact of higher fees and changes in the net tangible benefit rule.
Paydowns are estimated at $66 billion with month-to-date gross issuance at $70 billion, indicating modestly positive net supply for the month.