securities, and even with mortgage origination volumes on the decline some Wall Street firms have been stepping up their purchases as well.

Morgan Stanley last week urged investors to "overweight" their portfolios with mortgage-backed securities -- that is, to hold more than usual.

"The best approach is opportunistic accumulation of a long mortgage position," the firm said. It also told investors to hedge these investments with Treasuries, Treasury futures, or swaps. Meanwhile, the firm said it would maintain its "modest overweight position" and look for buying opportunities.

"Investors have come back into mortgages," said Ken Boertzell, a portfolio manager at New York Life Asset Management in Parsippany, N.J. The spread between yields on mortgage-backed securities and those on Treasuries tightened considerably in September, he said.

But Mr. Boertzell said he is not buying now, in part because lower loan volume has prompted mortgage bankers and other originators not to sell.

Many lenders say origination volumes remain in a state of flux. "The market has continued to swing effectively away from fixed-rates and toward adjustable-rate mortgages," said Peter L. Struck, first vice president and manager of the Treasury division at Washington Mutual in Seattle.

Mr. Struck said Wamu will have somewhat fewer mortgages to sell "because with the higher interest rates we're seeing a reduced amount of housing finance activity." Wamu, a portfolio lender, has been retaining its adjustable-rate mortgages in portfolio rather than selling them.

Mr. Struck said he expects origination volumes in the conventional mortgage market will slow through the end of the year. Supply continues to wane, and demand may do likewise because prepayments have slowed and investors have less cash flow from their existing portfolios to reinvest, he said.

"Over the summer, the mortgage market simply got too cheap," said Arthur Q. Frank, director of fixed-income research at Nomura Securities International. He said prices of all securities dropped compared with Treasuries because of imbalances between mortgage supply and demand.

Moreover, investors were worried that year-2000 issues might hamper financing of their mortgage-backed securities, Mr. Frank said in a research note. These fears were dispelled when Ginnie Mae, Fannie Mae, and Freddie Mac pass-through securities were ruled acceptable as collateral by the Fed in its repurchase transactions, he said.

Mortgage spreads were at their widest Aug. 5, when the current coupon mortgage reached 180 basis points over the 10-year Treasury. The spread tightened in September and on the last day of the month was 155 basis points.

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