April 15, 2019
Demand for new-issue hybrid ARMs slowed last week, which resulted in yield spreads to Treasuries widening 1 to 3 bps. The broader bond market moved down in price, sending yields higher across the curve. Year-to-date, ARMs have underperformed their fixed-rate MBS counterparts, with yield spreads tightening 8 bps on 15-year fixed and 9 bps on 30-year fixed.
The ARM origination cycle continued last week, with 157.9mm in new issue ARM selling split amongst Fannie Mae (71.3mm), Freddie Mac (6mm), and Ginnie Mae (80.6mm). Supply was focused in Ginnie Mae 5/1s (79.1mm) and Fannie Mae 7/1s (39.7mm). Fannie Mae also contributed to gross issuance with 7.4mm in 5/1s and 24.2mm in 10/1s. Last month, ARM issuance levels increased to 1.5 billion, reversing the downward trend seen between January and February.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- Seasoned Ginnie 3/1 2s with ~ 18 months to reset traded at a slight discount.
- Seasoned and new production 10/1s traded at a moderate premium.
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. With a couple of exceptions, Z-spreads widened for GNMA, FNMA, and FHLMC products.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP