December 17, 2018
Yield spreads on hybrid ARMs were 2 to 8 basis points wider on the week, as the yield curve shifted higher, with the 5-year and 10-year Treasury increasing 4 and 5 basis points, respectively. Both new issue and seasoned ARMs have widened over the course of the Fall as a result of wider mortgage spreads and lower tail values.
As stated in last week’s ARM update, November ARM prepayments decreased between 10% and 14% for all 3 agencies (see below). 120 WALA 5/1s paid 21 CPR in November, which was a 15% slowdown versus the prior month. Looking at less seasoned post resets, which have been more scrutinized by investors in recent months due to extremely fast speeds at reset, positive signs emerged as well. 61 WALA Fannie 5/1s (right after reset) paid 76 CPR, the third consecutive month below 80 CPR after seeing 90 CPR peaks during the summer months. Furthermore, post resets continue to exhibit fast burnout rates. After peaking anywhere from 70-90 CPR, 62-66 WALA 5/1s paid 50 CPR in November, while 67-71 WALA bonds paid 40 CPR. Speeds largely returned to 2017 levels on post resets. With valuations considerably cheaper, we see upside for the ARM sector going forward.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- Seasoned and new issue 10/1s with coupons ~3.3% to 3.6% traded at moderate premium. Over the last six months, we’ve seen coupons on hybrid ARM 10/1s increase from ~ 2.9% to 3.5%.
- Fannie Mega 5/1s with reset dates just beyond 2 years and gross WACs around 3.2% traded at a slight discount. These pools are a mixture of very short-reset bonds and longer-reset collateral.
- New issue Freddie Mac 7/1 Giants with ~80 months-to-reset traded at par.
The ARM origination cycle continued last week, with 281mm in new issue ARM selling primarily from Fannie Mae. Supply was focused in Fannie Mae 7/1s (73.7mm) and Freddie Mac 7/1s (51.2mm). The remaining weekly issuance was split between 5/1s (80.1mm) and 10/1s (74.1mm). In 2018, Fannie Mae has led new issue ARM flows with 6.9 billion with remaining YTD issuance split between Freddie Mac (3.6 billion) and Ginnie Mae (3.3 billion).
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. OAS widened for GNMA, FNMA, and FHLMC.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP