Mortgage investors tumbled down a bumpy hill this past week as mortgages underperformed 10-year Treasuries and lenders braced for a surge of refinancing activity.

From the bond market close on June 9 through the close on June 15, Treasuries rallied 23 basis points, making mortgages less attractive, said Stephen Smart-O'Connor, managing analyst of mortgage data at Technical Data.

"It was their worst period of the year," Mr. Smart-O'Connor said, adding that the last four days had market conditions similar to those of Oct. 27, 1997-the day the Asian crisis hit.

The downturn in mortgages was worsened by the "double whammy" of Asian turmoil and the recent dive of the stock market, Mr. Smart-O'Connor said.

The Asian situation has also "added fuel" to the rally in rates, said Dale Westhoff, senior managing director at Bear Stearns. When bonds rally, prices go up and rates go down.

Many mortgage investors are watching Japan closely and are "just going to stay on the sidelines," said Marito Domingo, treasurer for Washington Mutual in Seattle. Mr. Domingo said that because he invests primarily in shorter duration mortgages and adjustable-rate mortgages, he has maintained a neutral position and has not been a big buyer during these volatile times.

"There's been a lot of activity based on rising prepayment fears in the market, and that'sbeen exacerbated by the fact that we've just gone through this significant prepayment cycle," Mr. Westhoff said. Prepayments cost mortgage investors both principal and interest income, and the spike in prepayments in February and March is fresh in investors' minds, he said.

The mortgage basis-the current coupon spread over Treasuries-has widened by about 6 basis points over the last week, Mr. Westhoff said. And interest-only securities, which are especially susceptible to prepayment loss, are trading at near all-time low dollar prices, indicating that investors are worried about an upcoming prepayment wave, he said.

Treasury bond yields reached their lowest points since Jan. 12, Mr. Smart-O'Connor said, with the 10-year Treasury note reaching 5.35% on Monday.

Investors are watching interest rates closely and are more bullish on bonds, Mr. Smart-pO'Connor said. He noted a domino effect, with falling stock markets directly affecting Treasury buying. Investors are dumping both Asian and domestic stocks in favor of Treasuries and other bonds, he said.

Some mortgage investors are also dumping mortgages in favor of Treasuries now, he added.

Market observers said the 10-year Treasury drop has given homeowners more incentive to refinance, which is almost always bad for pass-throughs.

Investors are selling the mortgages securities with higher coupons because the higher-rate loans underlying the securities are the most likely to be refinanced. Investors who must maintain mortgages in portfolio have been focused on buying lower-coupon or discount bonds.

Prepayment risk on 30-year 7% and 30-year 7.5% loans was thought to be especially high, Mr. Smart-O'Connor said. But discount coupons with 6% and 6.5% rates were also hurt. "The whole market just got crushed," he said.

We are in "a very nervous period," Mr. Smart-O'Connor said.

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