April 1, 2019
Yield spreads on hybrid ARMs to Treasuries widened approximately 1 to 2 basis points last week, in response to the increased level of supply from originations and broader bond market rally. Hybrid ARM spreads widened in the month of March, lagging the performance of fixed-rate MBS, which tightened approximately 10 basis points. We continue to see relative value in ARMs as they remain 10 to 20 bps wider compared to levels in early December.
The ARM origination cycle continued last week, with 847.9mm in new issue ARM selling primarily from Freddie Mac (827.6mm). Supply was focused in Freddie Mac 7/1s (510mm) and Freddie Mac 5/1s (275.8mm). Freddie Mac also contributed to gross issuance with 41.8mm in longer-reset 10/1s. Fannie Mae contributed to 5/1 and 7/1 issuance with 10.8mm and 8mm, respectively. Last month, ARM issuance increased to 1.5 billion, the strongest level since May 2018. Freddie Mac contributed over 70% of gross issuance with 614mm of the new issue flows concentrated in 7/1s indexed to LIBOR.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- Seasoned Fannie Mega 10/1s with ~ 3.5% coupons and ~ 22 months to reset traded at a moderate premium. We continue to favor longer-resets (7/1s and 10/1s) as valuations remain relatively inexpensive and these structures compare favorably to 15-year MBS.
- Seasoned Ginnie 3/1 2s with ~ 18 months to reset traded at a slight discount.
The desk continues to look to bid odd-lot positions for clean-up. The disposition of odd-lot positions can result in enhanced transactional liquidity and higher earnings. Also, this is an opportunistic time to consider eliminating smaller line items that are subject to standard safekeeping and accounting fees that are more palatable for larger block sizes.
The following chart reflects the week over week change in Z-spreads for ARMs. Z-spreads widened for GNMA, FNMA and FHLMC products.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP