December 10, 2018
The ARM origination cycle continued last week, with 267.2mm in new issue ARM selling primarily from Fannie Mae and Ginnie Mae. Supply was focused in Fannie Mae 5/1s (53.4mm), Ginnie Mae 5/1s (48.7mm), and Fannie Mae 7/1s (92.2mm). The remaining 19% of weekly issuance was split between 10/1s (47.8mm) and 3/1s (2mm).
There continues to be demand for seasoned discount ARMs at these wider spread levels. Spreads on both seasoned and new issue paper are 12 to 21 bps wider since the beginning of 2018. We continue to prefer new issue ARMs at these levels given their lower sensitivity to tail values and lower expected rate shock at reset.
December-released factors indicated that November ARM prepayments decreased between 10% and 14% for all 3 agencies. As the recent prepayment report shows, short reset ARMs slowed considerably in November, which should serve as tailwind for seasoned paper.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- 4% – 4.4% Gross WAC Fannie Mae 10/1s traded at a moderate premium
- Fannie Mega 5/1s with reset dates inside of 12 months and Gross WACs between 4% and 4.5% traded at a moderate premium – These pools are a mixture of very short-reset bonds and longer-reset collateral
- Seasoned Freddie Mac 5/1 Giants with ~8 months-to-reset traded at a moderate premium
- Ginnie Mae II 5/1s with coupons between 3% – 3.5% and reset dates between 52 – 62 months-to-rest traded at a slight discount
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA ARM OAS’s tightened and FNMA and FHLMC widened.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP