Mortgages performed well in the holiday-shortened week and the beginning of June.

Barclays Capital analysts said that the excess return on the MBS Index month-to-date through Thursday was 17 basis points, and the index was ahead of ABS, CMBS and corporates.

Overall, MBS volume through Thursday averaged 82% compared to 108% previously.

Contributing to MBS' strength was some reversal of the risk aversion trade — through Thursday —supportive flows, as well as limited supply.

Mortgage banker selling averaged $1.8 billion per day, unchanged from the previous week, and consisted primarily of 4.5% coupons and to a smaller extent 4s and 5s.

Into mid-week, real and fast money were two-way in fuller as well as lower coupons. However, on Thursday as 5.5s through 6.5s hit record highs of 107, 108 and 109, respectively, some profit taking emerged in higher coupons to move down-in-coupon.

Up-in-coupon outperformed until Thursday, while lower coupons struggled with their negative convexity and price levels given the extension risk potential if yields back up.

On Thursday, though, up-in-coupon trading lagged lower coupons on the profit taking, which was readily absorbed by street shorts.

Partly contributing to the Treasury sell-off were expectations that Friday's jobs report would be stronger than expected.  This was heightened by comments on Tuesday from President Obama saying he expected a strong jobs report.

The market was shocked, however, as there was only a 41,000 increase in private employment. Overall job growth was reported at 431,000; however, 411,000 were Census related. In addition, the consensus call was for  over 513,000 jobs created.

Equities sold off sharply on Friday on the disappointing news, while Treasurys rallied on the flight to quality. This boosted the up in coupon trade and sent 5.5s through 6.5s to even new record high prices — albeit in minimal volume.

While lower coupons lagged, there was active servicer buying reported to offset the pickup in supply. At midday, spreads were three to four ticks tighter versus swaps on 5.5s through 6.5s, while lower coupons were 2-3 ticks wider.

In other activity during the week, GNMAs saw better buying in 4.5s and 5s from overseas investors, banks and money managers with better selling in 5.5s.

Meanwhile, 15s lagged 30s, while specified bid lists totaled over $2 billion primarily in 5.5s and 4.5s. Pay-ups remained under pressure due to the continued supply, high dollar prices and strong rolls.

May Agency Prepayments

The May prepayment report comes out later today. Overall, agency MBS paydowns are estimated at $115 billion in May.

Speeds on 30-year FHLMC Golds and GNMAs are projected to decline 5% to flat, respectively, on average in our sample due to a lower number of collection days 20 in May versus 22.5 in April, and a 20% decline in the Mortgage Bankers Association's Refinance Index on average in April in response to higher mortgage rates, ongoing tight credit standards, and still underwater housing values for many homeowners.

Fannie Mae continues its delinquency buyouts, which will be concentrated in 5% and 5.5% coupons. As a result, speeds are seen jumping around 100% from April.

Meanwhile, 6% coupons will see a large drop from the 70s CPR area to mid-20s on 2008-2006 vintages, while 6.5s and 7s have stabilized around 30 CPR to 35 CPR.

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