ARM Update

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

Investment Strategist

Vining Sparks, IBG

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