August 28, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged on the week, after tightening 5 bps the previous week. Weakening supply has been a tailwind for the sector and could continue to be, as August issuance is expected to be approximately 30% less than July.
There was strong demand for post-reset hybrid ARMs last week. Investors focused on buying seasoned conventional paper with a weighted average loan age of 65 to 75 months and coupons ranging from 3.20% to 3.40%. Buying activity has picked up after prepayment speeds declined during July.
New-issue hybrid ARMs remain attractive to fixed-rate MBS on a relative value basis. Buyers have primarily focused on longer-reset structures (new issue 7/1s and 10/1s). As outlined in the table below, new issue 7/1s and 10/1s offer similar yields as 3.00% 15-year MBS, but better OAS profiles.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG