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.

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