As real estate investment trusts and other investors have sold adjustable-rate mortgages in recent weeks, Wall Street has stepped in as a major buyer.

"Wall Street is buying the ARMs. We've seen very little of customer buying of Wall Street inventory," said Alec Crawford, mortgage strategist at Morgan Stanley.

Wall Street's purchase activity was born from a feeling that firms have to "step up and provide liquidity in the ARM market," Mr. Crawford said. "What they're discovering is it's very difficult to then go out and resell those ARMs at higher prices."

Wall Street now owns too many ARMs, Mr. Crawford said. With the flat yield curve, "it is not profitable for Wall Street to stockpile ARMs," he said.

But as Wall Street reserves are filling up with adjustable rate mortgages, traders are looking forward to Oct. 1, when the FHA program will once again begin insuring Ginnie Mae adjustables.

The market for current coupon ARMs, know as the TBA market, usually generates $3 billion to $5 billion of volume each month, said Sami Boustany, a vice president at Lehman Brothers.

With low rates and a flat yield curve, ARMs have experienced a "double whammy," Mr. Boustany said. ARMs prepayments have been "soaring through unprecedented levels," resulting in only negative yields, he added.

There is no reason for ARMs to tighten in the near term, Mr. Crawford said. He estimates that ARMs will cheapen a little bit to clear the market.

As bonds get 30, 60, and 90 days old and start to cross over into the next quarter, dealers are expected to pare back their positions.

Traders at ARMs desks on Wall Street are having difficulty finding buyers. With REITs either on the sidelines or on the seller side, there has been "a one-way flow," with Wall Street as the main buyer.

But Wall Street is starting to see some interest from money managers and banks, Mr. Boustany said. "Bonds are starting to trade in a two-way format."

Buyers of adjustable-rate mortgages are not the typical investors in 30- year mortgage-backed securities, Mr. Crawford said. But they now include domestic and foreign banks looking for a product that is cheaper than other floating-rate alternatives, he said.

Most investors are steering clear of adjustable-rate mortgages or being very choosy.

"We've held a stable allocation since the recent peak of the refi wave," said Gary E. Pzegeo, vice president and portfolio manager for the Evergreen Institutional Adjustable Rate Fund.

Though the Evergreen fund has cut back its ARM position in the past year, it now has close to a 70% allocation, Mr. Pzegeo said.

"We're being selective," Mr. Pzegeo said. Purchase activity now includes more swapping into prepayment-protected positions such as hybrid adjustable-rate mortgages, he said.

ARMs are expected to remain relatively liquid for the next couple of months, Mr. Crawford said, but the situation may improve in the fall if prepayments on conventional ARMs slow.

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