MBS flows were modest last week as many participants remained out on vacation. However, in early trading Thursday - following the terrorist bombings in London - mortgage spreads were wider on the flight-to-quality bid in Treasurys and the uptick in volatility. The cheapening, however, drew good buying in 5.5s and 6s. Expectations are that investors will take advantage of the cheapening as near term events, such as non-farm payrolls and paydowns, tend to be supportive of the sector. Still, the tragedy unfolding in London does add some uncertainty to investor participation.

During most of the week, activity was focused on moving up in coupon into 5s, 5.5s and 6s. Money managers, in particular, were strong buyers of 6% coupons last week. Meanwhile, the early part of the week saw short covering in 5s as a result of the latest MBS bank holdings report for large banks. The report showed a $54 billion increase in passthroughs. This follows the $64 billion decline in the June 15 report. This also suggests that outright sales of passthroughs were probably around $10 billion to $12 billion, reported Merrill Lynch analysts, rather than substantially more as suggested by the $64 billion drop.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.