August 20, 2018
Spreads were unchanged in ARMs last week despite the slight widening in their fixed-rate counterparties. The August ARM origination cycle started and despite the cyclical increase in supply, volumes were comparably lower versus last month. The increase was primarily driven by higher G2 5/1 issuance, which was at the expense of 3/1s. The issuance of 3/1s has been minimal due to the flat curve and the net tangible benefit test for VA loans.
Activity was primarily focused on the following last week:
- In seasoned space, 24-year 3.5s traded above par – 3.5s offer value given the wider spread and the reduced cap risk on higher coupons
- Seasoned 5/1 Fannie Mae hybrid ARMs with 4 to 6 months-to-reset (MTR) traded above par – 5/1s in general look on the tighter side, as spreads are only slightly wider versus the beginning of the year (adjusting for dollar price)
- G2 5/1 3.5s with 62 months-to-reset (MTR) traded above par – These bonds have the potential to widen into a 50bp selloff and 50bp rally
- Fannie 7/1s and 10/1s maturing in 30-years traded just above par as spreads are wider
- Short reset bonds with 33 – 44 months to reset (MTR) with 2/2/5 and 5/2/5 cap structures – These bonds offer low duration and an annual, adjustable floater off LIBOR
- Swaps and portfolio cleanups for underperforming bonds sold in 2012 and 2013 and reinvested at higher rates
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA, FNMA, and FHLMC OAS’s widened.
Ricky Brillard, CPA
Vining Sparks, IBG