February 11, 2019
Yield spreads on hybrid ARMs to Treasuries tightened approximately 1 to 4 basis points last week, despite most mortgage-related sectors experiencing some degree of spread widening. Spreads have tightened recently but remain wider compared to levels at the start of December.
The ARM origination cycle continued last week, with 255.7mm in new issue ARM selling primarily from Fannie Mae (130.3mm). Supply was focused in Fannie Mae 7/1s (62.5mm) and 10/1s (62.6mm) along with Ginnie Mae 5/1s (61.6mm). Freddie Mac also contributed to gross issuance with 17mm in 5/1s, 32.8mm in 7/1s, and 10.7mm in 10/1s.
New issue supply picked up in January, driven primarily by an increase in Ginnie Mae 5/1s. Production in G2 5/1s appears to be increasing even as conventional ARM supply has been stagnant (388.1mm G2 5/1s produced in January 2019 versus 2.2bn in 2018) and expect the larger pool sizes to boost liquidity and customer demand, especially given the wide spreads in the sector.
For the third month in a row, prepayments for conventional hybrid ARMs declined. February-released factors indicated that January ARM prepayments decreased .5% to 5% for all three agencies. In aggregate, Fannie ARM speeds slowed .40 CPR to 18.8, Freddie declined .90 CPR to 16.8, and Ginnie decreased .10 CPR to 19.4.
Shorter-reset LIBOR-based Fannie 3/1s decreased 5 CPR to 23.20 and 5/1s decreased .80 CPR to 24.4, whereas longer-reset 7/1s increased .5 CPR to 16.5 and 10/1s increased .3 CPR to 9.60. In the Ginnie sector, Treasury-based 3/1s, 5/1s, and 7/1s paid 21.5 CPR (+.94%), 17.90 CPR (+.56%), and 14.4 CPR (-36.84%), respectively.
Overall, it was a relatively quiet week in terms of flows for hybrid ARMs. New issue Freddie Giant 10/1s with ~4% weighted average coupons traded at a moderate premium ($101+). Also, Fannie Mega 10/1s with less than 10 years to the reset traded near par. Generally, these conventional hybrid ARMs 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. OAS tightened for GNMA and except for some longer-reset conventional bonds, OAS widened for FNMA and FHLMC.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP