December 3, 2018
The ARM origination cycle continued last week, with 87.5mm in new issue ARM selling primarily from Freddie Mac. Supply was focused in new issue 7/1s (50.2mm) with the remaining split between 5/1s (18.4mm) and 10/1s (18.3mm). ARM gross issuance remains at multi-year lows as November issuance came under 1 billion for the second consecutive month (see below).
Despite the lack of supply ARM spreads have widened over the course of the Fall as a result of wider mortgage spreads and lower implied tail values (101.5 to 102). Year-to-date wides in spreads coupled with low dollar prices have certainly drawn investor interest.
Last week, ARM activity was focused on seasoned 7/1s and new issue 10/1s. Fannie Mega 7/1s with a fixed-rate period greater than 80 months and a gross weighted average coupon in excess of 4% traded at a moderate premium. Also, Fannie Mega 10/1s with slightly less than 10 years to the reset traded near par. Dollar prices for conventional hybrid ARMs have been low for an extended period and generally, they have a higher minimum speed threshold, which translates into solid cashflows for the investor.
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA ARM OAS’s widened and FNMA and FHLMC were mixed.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP