It wasn't the Federal Open Market Committee that shook up the markets last week, but the surprising announcement from the Treasury about the 30-year bond's potential return. Treasury prices fell and the curve steepened on the news. The curve response elicited a modest response in mortgage flows - particularly from hedge funds - with moves up in coupon in 30s and into 15s. Servicers were also said to be adding duration with FNMA 5.5s and Dwarf 4.5s. The curve steepening, however, has resulted in a modest extension in FNMA 5s as well as the overall MBS Index, said JPMorgan Securities. As a result, analysts warn of potential servicer selling when durations are recalculated.

As of press time, there was still the April non-farm payrolls report to get through last Friday and there is some expectation that it could be stronger than expected. In general, a back up in yields is considered favorable for mortgages and could help bring in the overseas buyers. At current levels, however, mortgages are anticipated to hold in a narrow range.

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