ARM Update

August 26, 2019

Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 2 basis points last week.  In a speech at the annual Jackson Hole symposium sponsored by the Kansas Fed, Chairman Jerome Powell described a “new normal” characterized by low inflation, a low neutral policy rate and trade policy uncertainty, with the latter representing a new challenge with no recent precedent to guide any policy response.  ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 5 bps on the 15-year fixed and 4 bps on the 30-year fixed.  As mentioned in last week’s update, we continue to see relative value in longer-reset 10/1s as they remain approximately 40 bps wider compared to levels in early March.

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

The ARM origination cycle was light last week, with 29.2mm in new issue ARM selling split amongst Fannie Mae (0.7mm), Freddie Mac (13.2mm), and Ginnie Mae (15.3mm).  Supply was focused in 5/1s with Fannie Mae issuing 0.7mm, Freddie Mac issuing 5.2mm, and Ginnie Mae issuing 15.3mm.  Freddie Mac also contributed to 7/1 and 10/1 issuance with 6.7mm and 1.3mm, respectively.  ARM gross issuance remains at multi-year lows as it came under 1 billion for the third consecutive month in July.

Hybrid ARM issuance remains quite low.  As of August, hybrid ARM issuance represents ~ 0.56% of overall MBS issuance.  Nevertheless, issuance volumes have been at their highest levels in Ginnie Maes and despite the meager volumes, hybrid ARM issuance as a percentage of overall MBS issuance trended higher last month versus May and June.

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

On July 11th, the Alternative Reference Rates Committee (ARRC) released a white paper detailing how an average of the Secured Overnight Financing Rate (SOFR) can be used in newly-issued ARMs in a structure that is comparable to today’s existing ARM loans.  The white paper shows how SOFR can be used to develop products that are built on a robust reference rate that is grounded in market transaction.  Here’s an overview of the ARRC’s proposed models of SOFR ARMs:

The desk continues to look to bid odd-lot positions for both conventionals and Ginnies 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.

Ricky Brillard, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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