April 17, 2017
Adjustable Rate Mortgage Market Update
Yield spreads for new-issue hybrid ARMs to Treasuries widened by 3 to 4 bps on the week. However, this was based on a holiday-shortened week with relatively light volumes of trading in any ARM issues, including new issues. There should be more of the April supply coming into the market this week.
As previously mentioned, there was heavy selling in the secondary market of seasoned hybrid ARMs in recent weeks. This has impacted valuations with spreads moving wider. The recent widening trend has created opportunities within the market. In particular, some investors have a renewed interest in post-reset ARMs, which have cheapened by approximately a half point. Post-reset hybrid ARMs work well for investors looking for short duration paper and they compare favorably to other floating-rate alternatives. For instance, post-reset hybrid ARMs (75-85 WAL) are projected to yield 1.75% to 2.00%, while CMO floaters are closer to 1.25%. In addition to offering more attractive spreads, seasoned ARMs can offer better convexity. At least a portion of the most reactive borrowers in these pools refinanced during the period of low rates observed during 2016. As a result, the remaining borrowers could exhibit a more subdued prepay response than new issues into an interest rate rally.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG