ARM Update

August 5, 2019

Last week, yield spreads between hybrid ARMs and Treasurys were mixed with Ginnie 2s tightening approximately 3 to 5 basis points and conventionals widening approximately 1 or 2 basis points.  The broader bond market moved up in price, sending yields lower across the curve as the Fed cut rates by 25 bps in an effort to sustain the economic expansion.  Fed Chairman Powell noted last week’s policy action was a “mid-cycle adjustment” which was perceived as slightly hawkish by markets.  Despite tightening ARM spreads, we continue to see relative value in ARMs as they remain 23 to 47 bps wider compared to levels in early December.

New issuance for July totaled 748.6mm versus lower levels of 631.4mm and in May and June, respectively.  Supply was split amongst Fannie Mae (321.8mm), Freddie Mac (250.9mm), and Ginnie Mae (175.9mm).  Supply was focused in 5/1s and 7/1s with 297.5mm and 276.9mm issued, respectively.  Fannie Mae and Freddie Mac also contributed to gross issuance with a combined 170.5mm in longer-reset 10/1s.  ARM gross issuance remains at multi-year lows as it came under 1 billion for the third consecutive month.

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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