January 28, 2019
Yield spreads between new-issue hybrid ARMs and Treasuries were unchanged last week, as the broader bond market moved up in price, sending yields slightly lower across the curve. ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 1 to 2 basis points on MBS for the week.
The ARM origination cycle continued last week, with 234.4mm in new issue ARM selling primarily from Freddie Mac (157mm). Supply was focused in Ginnie Mae 5/1s (59.5mm), Freddie Mac 7/1s (68.5mm), and Freddie Mac 10/1s (59.9mm). Although Fannie Mae has issued approximately 50% of hybrid ARMs since January 2018, issuance this week was light at 17.9mm. As seen in the chart below, hybrid ARM issuance has steadily increased since November 2018.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- New issue Fannie Mega 5/1s and 10/1s with high coupons (~ 2.8% – 3.6%) and less than 3-year resets traded at a moderate premium ($101 – $102).
- New issue Fannie and Freddie Giant 10/1s with gross WACs between 3.9% – 4.6% and high yields (3.1%+ in the base case) traded near par.
- Seasoned Freddie Giant 5/1s with coupons exceeding 4% traded at a moderate premium ($102+).
10/1 hybrid ARMs have become attractive to investors due to their higher yields. Additionally, longer-reset ARMs compare very nicely with similar duration 15-year MBS. Having the flexibility and potential for coupons to reset up if rates rise is an attractive scenario for investors. Since 10/1 hybrids perform similarly to products many investors already like to buy, it makes them that more attractive.
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA, FNMA, and FHLMC ARM OAS’s were mixed.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP