ARM Update

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:



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

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
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120