Mortgage spreads were hit early in the week on originator and servicer selling, and investor profit-taking to move up in coupon, brought on by a heavy sell-off in Treasurys following strong economic reports. From the April 8 close through Wednesday's close, the 10-year yield backed up 18 basis points. While there was originator selling, it was rather modest given the backup and averaged about $1.5 billion per day, mostly in 5% coupons. Daily servicer selling over the first three days of the week averaged $2.5 billion per day.

Late Wednesday, the tide started to turn as investors began moving down in coupon given the market's repricing and improved outlook. In recent comments from Bear Stearns, analysts remain bullish on mortgage spreads. They believe if rates continue to hold around current levels and originator pipelines continue to empty, risk (both refi and delta hedging) in the MBS market will continue to decline. At this time, they "would look to add spread duration (because the basis is likely to tighten) and shed some convexity (because implied volatility is expected to decline) at the right prices," the analysts said.

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