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:
- New issue FN/FH 7/1s and 10/1s (offer similar yields to 15-year MBS with less price volatility and a pick-up of OAS)
- GN 3/1 2.00s
- GN 5/1 2.50s
- Odd-lot trades (small block sizes and strategic tax loss swaps)
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG