April 10, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries widened by 1 to 2 bps on the week. The continued widening represents the recent increase in supply (issuance trends detailed below). Higher supply should continue in the near-term based on seasonal trends.
The secondary market is still digesting the $2.5bn in seasoned selling that occurred during March. The heavy selling has impacted valuations as spreads have moved wider across most reset buckets. Essentially the supply/demand imbalance that existed to start 2017, which caused spreads to tighten to historic lows, is now reversing itself.
Activity last week was focused on:
- GN 3/1 2.0s
- Conventional 5/1 2.5s
- Odd lot clean-up trades (robust demand for most conventionals and seasoned Ginnie pools)
Like their fixed-rate counterparts, hybrid ARM prepayment speeds accelerated in March, primarily due to seasonality and day count. In aggregate, Fannie ARM speeds increased 4.2CPR to 22.6CPR, while Freddie ARMs increased 4.3CPR to 22.8CPR. LIBOR-based Fannie 5/1s rose 5.3CPR to 27.0CPR, 7/1s increased 3.4CPR to 18.8CPR, and 10/1s climbed 2.8CPR to 14.2CPR. Prepayment speeds for Freddie were very similar, as 5/1s increased 5.3CPR to 29.2CPR, 7/1s rose 3.2CPR to 17.8CPR, and 10/1s increased 5.1CPR to 15.7CPR.
Hybrid ARM issuance for March increased $249.2mm or 15.6% over the previous month. Issuance by Fannie and Freddie was again almost entirely in LIBOR-based ARMs. FNMA accounted for the majority of the monthly increase, issuing approximately $1.0bn for month, which was an increase of $243.0mm. Freddie and Ginnie volumes were relatively steady compared to the previous month. In aggregate, 7/1s experienced the largest increase, climbing 22.0% or $149.4mm. 10/1s spiked 30.2% or $95.0mm to $408.2mm. 10/1 issuance has steadily increased in each of the first three months of 2017.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG