ARM Update

January 22, 2018

Yield spreads on new-issue hybrid ARMs to Treasuries tightened 1 to 2 basis points last week, which was the result of a modest bond market sell-off that generally sent yields higher across the curve.

Flows in the secondary market for ARMs were relatively high, especially for a holiday-shortened week.  Investors continued to buy new issue conventional 7/1s.  As we have previously mentioned, this reset type compares well to 10- to 20-year MBS in terms of yield and effective duration, while offering a pick-up of OAS.  We also observed demand for GN 3/1 2.5s as investors were drawn to the short end of the curve because of the improvement in yields.  The projected yield on a new issue GN 3/1 is currently stands at 2.4%, which is up ~70 bps since the beginning of September 2017.

Finally, there was some selling of seasoned ARMs in the secondary market, primarily post-resets with a weighted average loan age of 150 months or higher.  The bid on this type of product has remained strong, due to new supply volumes trending lower.



Metrics for some commonly traded structures are below:



Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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