February 20, 2018
Yield spreads between new-issue hybrid ARMs and Treasuries were 1 to 2 basis points wider last week, generally lagging the widening experienced in fixed-rate MBS. The theme in the ARMs space continues to be lower dollar prices, higher projected returns, and better performance compared to fixed-rate MBS. We are now seeing newer issue paper trading in the secondary market close to par and into discount territory, which has further enhanced valuations.
Activity last week was primarily focused on the following:
- New issue conventional 7/1s (compare favorably to 10- to 15-year MBS in terms of yield, price volatility, OAS, and total return)
- GN 3/1 2.0s and 2.5s
- GN 5/1 2.5s (trading at discount)
There was also demand for seasoned 5/1s with one year or less to the reset date. Investors have been drawn to these products with relatively low price volatility as rates have steadily increased.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG