ARM Update

December 18, 2017

Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged last week, lagging the performance of longer duration MBS (which tightened 2 to 3 basis points).  Yield spreads on new issue 5/1s and 7/1s have remained stable since October, despite a selloff on short Treasuries and fixed-rate MBS tightening. This trend has resulted in hybrid ARMs being less expensive on a relative basis compared to fixed-rate MBS alternatives.  Because of these dynamics, combined with slower prepayment speeds and declining originations (supply), there has been a steady demand for new issue hybrid ARMs.

Due to the anticipated change in tax law, we have seen some investors sell lower-performing ARMs at a loss. This strategy can result in favorable tax treatment for the losses and improved performance for 2018 from higher yields/earnings.

Last week, activity was focused on the following:



Metrics for some commonly traded structures are below:

Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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