Mortgage flows picked up after a two-week slowdown related to the traditional summer doldrums. Originator selling averaged between $1 billion and $2 billion per day. At the same time, investor activity was mixed with heavy selling noted from hedge funds and money managers in the early part of the week. The subsequent widening attracted buyers later in the week with servicers seen to be moving down in coupon from 5.5s, and fast money accounts moving up in coupon to 6s. Over the Thursday-to-Thursday period, spreads were two basis points tighter in 30-year Fannie Mae 5% through 6% coupons. Dwarfs were slightly better at plus three to four basis points in 4.5s through 6s.

Analysts are mixed on the near-term outlook for the mortgage sector. JPMorgan Securities says it remains negative on the basis due to poor rolls, tight spreads, steady originator supply and GSE concerns. Lehman Brothers is holding neutral, saying that the sector looks fair at best, the roll market is lackluster, and there remains the overhang of convexity risk and heightened implied vols, but there is upside potential from pent-up bank demand. Finally, UBS Warburg retains its modest overweight due to the favorable market technicals.

Mortgages best performing sector in August

According to Lehman, mortgages in August recorded the highest return at 39 basis points versus other components of the Aggregate Index. The second highest sector was credit at plus 24 basis points. The worst performing sector was ABS, which earned just four basis points in excess return versus Treasuries.

Year-to-date, mortgages have recorded excess return versus Treasuries of minus 71 basis points and is the worst performing sector. Agencies are second with excess return of minus 5 basis points. Credit is the top performing sector at plus 361 basis points.

MBA reports mixed application report

For the week ending Aug. 29, the Mortgage Bankers Association (MBA) reported a 3% increase in the Purchase Index to 396, and an 8.6% decline in the Refi Index to 1982. This was the ninth straight week of declines in the Refi Index. Over this period, the index has plunged 71%. As a percentage of total applications, refinancings were 45.9% versus 48.9% in the previous report. At the same time, ARM share dipped to 23.3% from 24.4%. In comments from Citigroup, the firm attributed the decline in the Refi Index to burnout and the Labor Day holiday. Looking ahead, Lehman predicts the Refi Index will fall below 1500 over the next two weeks due to the combination of burnout and a much smaller refinanceable universe.

Mortgage rates jump more than expectedFreddie Mac reported a 12 basis point gain in the 30-year fixed-rate mortgage rate to 6.44% for the week ending Sept. 5. Rates were expected to remain flat from the previous week's report. This is the highest level that rates have been since Aug.1, 2002, when the 30-year reported in at 6.43%. The 30-year rate is 123 basis points above June's record low of 5.21%.

Also reported, both the 15-year fixed rate mortgage rate and one-year ARM rate rose 10 basis points to 5.77% and 3.98%, respectively.

The August prepayment report will be released on Monday, Sept. 8. Speeds are predicted to slow 10% to 15% with more dramatic declines coming in the September report. Consensus expectations are shown in the following table above.

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