August 6, 2018
Last week, activity was primarily focused on the following:
- In seasoned space, 7/1 hybrids with 5 to 6 years to reset and WACs in the 3.50% range offered just below par
- 3/1 Ginnie Mae ARMs with 1 year seasoning and 2.00% coupons
- Swaps and portfolio cleanups for underperforming bonds sold in 2012 and 2013 and reinvested at higher rates
On the buy side, short reset (6-months or so) conventional ARM Pools with 5/2/5 caps and 3.25% to 3.50% WACs traded. With premiums of just under 3%, expect a bit of chop for the next few months as summer seasonal prepayments wrap up and it approaches reset, then a spike at/just after the reset, and a gradual slowing thereafter. See the bond’s projected prepayment chart below:
Right now, seasoned paper (i.e. 5/1s and 7/1s with 6 – 28 months to roll) offer compelling yields relative to their short durations. Also, we continue to see interest in seasoned 7/1s and 10/1s with 60-MTR and 5/2/5 caps.
Prepayment speeds come out tonight and are projected to be roughly flat versus last month. Post reset speeds set new highs last month as borrowers continue to adjust to higher rates and as a result to seasonals. Post resets hit their seasonal peak in June last year before declining in July, so look to see if a similar trend is developing this year.
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA ARM OAS’s tightened, while FNMA and FHLMC OAS’s widened.
Ricky Brillard, CPA
Vining Sparks, IBG