January 14, 2019
Yield spreads for new-issue hybrid ARMs to Treasuries remained stable last week, as the overall bond market traded in a narrow range that resulted in minimal increases to yields.
The ARM origination cycle continued last week, with 397.3mm in new issue ARM selling primarily from Fannie Mae (163.2mm) and Ginnie Mae (168.2mm). Supply was focused in Ginnie Mae 5/1s (164.4mm) and Fannie Mae 5/1s (55.9mm). The remaining weekly issuance was split between 3/1s (3.8mm), 7/1s (87.5mm) and 10/1s (59.7mm). In 2018, 72% of new issue ARM flows were concentrated in 7/1 hybrids (5.75 billion) and 5/1 hybrids (4.6 billion).
For the second month in a row, prepayments for conventional hybrid ARMs declined. January-released factors indicated that December ARM prepayments decreased 2% to 5% for all three agencies. In aggregate, Fannie ARM speeds slowed .40 CPR to 19.2, Freddie declined .60 CPR to 17.70, and Ginnie decreased 1.10 CPR to 19.5.
Shorter-reset LIBOR-based Fannie 3/1s increased 4.60 CPR to 28.20 and 5/1s increased .30 CPR to 25.20, whereas longer-reset 7/1s declined 1 CPR to 16.00 and 10/1s declined 1.40 CPR to 9.30. In the Ginnie sector, Treasury-based 3/1s, 5/1s, and 7/1s paid 21.3 CPR (-4.05%), 17.80 CPR (-6.32%), and 22.80 CPR (-27.62%), respectively.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- Seasoned Freddie Mac 5/1 Giants with 3 to 7 months-to-reset and gross weighted average coupons between 3.2% and 3.4% traded at a moderate premium.
- Seasoned Freddie Mac 5/1 Giants with 3 to 4 months-to-reset and coupons ~ 4% to 4.2% traded at a moderate premium.
- Seasoned Freddie Mac 5/1s Giants with 32 months-to-reset and coupons ~ 2.2% traded at a moderate discount.
- New issue Fannie Mega 5/1s with reset dates just inside 2 years and gross weighted average coupons between 3.1% and 4% traded at a moderate premium. These pools are a mixture of very short-reset bonds and longer-reset collateral.
- New issue Ginnie 5/1s with coupons between 3% and 3.5% traded at a moderate premium.
As reflected on the chart below, prices for 10/1 hybrids have increased from ~ $100 to $102 in the last six months. In the same time, 7/1 hybrid prices have remained stable around $101 while 5/1 hybrid prices have decreased ~ 40 basis points from $101.20 to $100.79.
The following chart reflects the week to week change in LIBOR option-adjusted spreads for ARMs. OAS tightened for GNMA, FNMA, and FHLMC.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP