February 26, 2018
Yield spreads between new-issue hybrid ARMs and Treasuries held firm last week. Activity was primarily focused on the following:
- New Issue Conventional 7/1s – These structures continue to compare well to 10- to 15-year MBS in terms of yield, price volatility, OAS, and total return.
- GN 3/1 2.0s & 2.5s – Trading at discount or near par depending on the coupon. This sector comprises nearly 20% of current supply, and demand from investors has remained relatively stable, keeping spreads tight and in a narrow trading range.
- GN 5/1 2.5s – Trading at a discount, which has eliminated the yield sensitivity to faster prepayments.
- Odd-Lots – Bids remain strong for odd-lot ARM positions. We have seen a number of investors take advantage of the move higher in rates with the disposition of underperforming bonds, in order to reposition portfolios for higher performance.
- Short Resets – Investors are also targeting conventional short resets (3- to 6-months to the reset date) to hedge against further increases in market rates.
Earlier this month, Ginnie Mae announced a plan to target certain lenders with expulsion from its primary bond program over VA loan churning. According to the announcement, Ginnie Mae notified a small number of issuers that have prepayment speeds that are outliers compared to other participants in the Ginnie Mae multi-issuer mortgage-backed securities.
The Agency’s recent moves are part of a broader effort to curb rapid refinancing of loans in Ginnie Mae securities. Earlier this year, a group of 12 senators introduced the “Protecting Veterans from Predatory Lending Act of 2018.” The bill would require lenders to demonstrate a “material benefit” to consumers when refinancing their mortgage.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG