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U.S. mortgage market mixed as prepay worries brew
By Aleksandrs Rozens
NEW YORK, March 18 (Reuters) - U.S. mortgage-backed
securities prices were unchanged to weaker, while spreads were
mixed early on Thursday as investors closely watched U.S.
Treasury yields for any drop that could further inflame
prepayment worries.
"The Treasury market does not want to go down (in price),
making the mortgage market jittery," said David Brownlee,
portfolio manager at National Life Capital Management Co. in
Montpelier, Vermont.
Early Thursday, the yield on 10-year Treasury notes
<US10YT=RR>, a proxy for U.S. 30-year mortgage rates, was
at
3.73 percent. The price declined 3/32 from late Wednesday.
Brownlee said a sharp rise in demand for mortgage
applications recorded by a weekly survey of lenders has served
as a reminder to investors: low mortgage rates bring with them
heightened refinancing and prepayment activity.
The Mortgage Bankers Association on Wednesday said its
weekly refinancing index jumped nearly 40 percent. These
refinancings are expected to work their way through the
mortgage finance system as prepayments, forcing investors to
put their money back to work in lower yielding investments.
"While the wave of refinancings will be a lot lower than
last time (in 2003) there is a concern," among investors, said
Brownlee.
Mortgage rates have drifted lower over the last week,
according to a survey conducted by Freddie Mac. The housing
giant reported on Thursday that 30-year fixed rate mortgages
declined to 5.38 percent this week from 5.41 percent last
week.
Early this session, mortgage bonds saw little selling by
lenders, according to a mortgage bond trader with a dealer
firm.
The trader said higher coupons were not trading as actively
this session because prepayment concerns were concentrated in
these securities.
But, the trader added that there is better buying of 5
percent and 5-1/2 percent securities when U.S. yields rise
slightly. That is because with a rise in yields, prices drop
enough to attract investors looking to buy on dips in bond
prices.
Conversely, when U.S. yields drop amid a Treasury price
rise that brings mortgage bond prices higher, some investors
sell mortgage bonds.
"We are seeing some bank buying on any weakness," said
the
pass-through trader.
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