ARM Update

April 8, 2019

March was a challenging month for hybrid ARMs, with spreads widening approximately 10 or 11 basis points.  The widening was driven by the reduced demand at higher dollar prices into the rally.  Recently, we’ve seen buyers emerge due to the wider spreads and as rates have receded from the lows.  Overall, hybrid ARM spreads remain approximately 22 to 35 basis points wider than March 2018, and last month’s poor performance has created an attractive entry point for relative-value players.  ARMs have been unaffected by the increase in WAC/coupon spreads this year, and the continued decrease in 12-month LIBOR should reduce rate shock for post-reset borrowers, ultimately benefiting tail values.


The ARM origination cycle continued last week, with 206.4mm in new issue ARM selling split amongst Fannie Mae (59.1mm), Freddie Mac (79.4mm), and Ginnie Mae (67.9mm).  Supply was focused in Freddie Mac 10/1s (75.5mm) and Ginnie Mae 5/1s (67mm).  Fannie Mae also contributed to gross issuance with 20mm in 5/1s, 19.8mm in 7/1s, and 19.3mm in 10/1s.  Last month, ARM issuance levels increased to 1.5 billion, reversing the downward trend seen between January and February.

For the second consecutive month, prepayments for conventional hybrid ARMs increased.  April-released factors indicated that March ARM prepayments increased 9.05% to 10.99% for all three agencies.  In aggregate, Fannie ARM speeds increased 2.1 CPR to 21.2, Freddie rose 2.5 CPR to 19.8, and Ginnie increased 1.9 CPR to 22.9.

Shorter-reset LIBOR-based Fannie 3/1s increased 0.5 CPR to 22.6 and 5/1s increased 2.8 CPR to 26.8.  Longer-reset 7/1s increased 2.3 CPR to 20.1 and 10/1s increased 0.3 CPR to 11.2.  In the Ginnie sector, Treasury-based 3/1s, 5/1s, and 7/1s paid 26.3 CPR (+9.13%), 20.1 CPR (+8.65%), and 31.7 CPR (+69.52%), respectively.

Last week, ARM activity was spread across a variety of lists and primarily focused on the following:



The following chart reflects the week-over-week change in Z-spreads for ARMs.  Z-spreads tightened for GNMA, FNMA and FHLMC products.


Ricky Brillard, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120