ARM Update

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:



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

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