ARM Update

April 2, 2018

Yield spreads between new-issue hybrid ARMs and Treasuries were 1 to 2 bps wider last week.  The widening can be attributed to the recent rally in bond prices and a reflection of the increased prepayment risk on newly issued bonds with higher weighted-average coupons (WAC).  For example, newly originated 7/1s for settlement in May have an average WAC of 4.24% compared to 3.54% in December.

The flatter curve (lowest 2s/10s spread of the cycle reached last week) also increases the potential for these higher WAC loans to refinance into a fixed rate mortgage as well as a new ARM.  The spread between a 30-year fixed rate mortgage and a 7/1 currently stands at just 29 bps compared to 71 bps one year ago.


Last week, activity was primarily focused on the following:



Metrics for some commonly traded structures are below:





Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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