ARM Update

January 29, 2018

Yield spreads on new-issue hybrid ARMs to Treasuries tightened approximately 1 basis point last week, despite the second straight week of spread widening experienced in fixed-rate MBS. Overall, it was a relatively quiet week in terms of flows in the secondary market for ARMs. Activity was primarily focused on buying of new issue conventional 7/1s. These structures continue to show relative value among the various reset types and particularly compared to 10- to 15-year MBS. There was also demand for GN 5/1 2.5s as prices have declined to near par.

For investors seeking liquidity or to reposition, there is strong demand for seasoned 5/1s and 7/1s with approximately 30-months to the reset date. These products are trading at historically tight yield spreads to Treasuries.

Supply of new issuance will likely continue to be impacted by the convergence in hybrid ARM rates and longer-term fixed mortgage rates. The sell-off on the front-end of the yield curve has caused a meaningful impact to 3/1s, as highlighted on the graph below.




Metrics for some commonly traded structures are below:





Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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