ARM Update

February 4, 2019



Yield spreads for hybrid ARMs to Treasuries were stable for the week, despite a bond market rally that led to Treasury yields falling across the curve.  ARMs underperformed their 30-year fixed-rate MBS counterpart, with yield spreads tightening on this product approximately 2 basis points for the week.  Faster prepayments will be the main risk to the ARM sector going forward, but they should have a minimal impact with the majority of recent issuance still trading in the $101 – $102 range.



Post resets have been plagued by fast prepayments as borrowers react to their mortgage rate increasing.  However, 12-month LIBOR has stabilized over the past three months and actually declined 18 basis points since November 9th (see below).  Borrowers resetting this spring will face significant rate increases based on lower index rates a year ago, but if 12-month LIBOR continues to stabilize, the borrowers resetting this summer will see lower rate increases than in years past and should begin to exhibit burnout in prepayments.



Last week, ARM activity was spread across a variety of lists and primarily focused on the following:

 

 

The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. With the exception of some short-reset conventional bonds, OAS widened for GNMA, FNMA, and FHLMC.





 



Ricky Brillard, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120