Friday, the Fed continued to be the only material buyer although it was their lightest day of buying all week. Despite flows heavily skewed to the sell side, mortgages were 13 to 14/32nds tighter (better performing) at 1PM. At the early close (2pm), the 30yr 4.0 Mar closed -19/32 (99-01), the 30yr 4.5 Mar was -13/32 (100-23+), and the 15yr 4.0 Feb was -12.5/32 (100-27+). 30yr Treasuries continued to loose ground through the holiday shortened day, leading the way for shorter-dated treasuries. The tightening of mortgages despite heavy supply can be tied to the losses in Treasuries, as 30yr Tsy's were down 4 points on the day. At 2pm, the 2yr was -5.25/32 (0.964), the 5yr was -22.75/32 (1.871), and the 10yr was -45/32 (2.893).
Both Treasuries and mortgages are up this morning driven by increased concerns that the economic recession is deepening, prompting investors to seek safer assets. Currently, the 2yr is +3/32 (0.903), the 5yr is +15.5/32 (1.762), and the 10yr is +35/32 (2.754). Friday's Univ. of Michigan report on U.S. consumer confidence showed an unexpected drop for the first time in 3 months to 56.2, pushing quite close to the 28yr low recorded in November. The report also indicates that U.S. households will continue to boost their savings and limit spending to build up reserves against unemployment and/or pay cuts.
This week the market will focus on any reaction from this past weekend's G7 meeting, further details on Treasury Secretary Geithner's bank bailout plan, GM and Chrysler's finalized restructuring plans to receive additional federal aid, and oil prices which fell last week on weak demands and insufficient production.
Last week, lenders saw lock volumes increase as the week progressed, with zero point rates ranging anywhere from 4.875% to 5.125%. Coverage ratios reportedly dipped to the mid to low 70% range as the hedge coupon of choice remained in the 4.5% coupon, representing approximately 48% of forward hedge activity.