ARM Update

January 7, 2019

Since the last ARMs update, yield spreads on hybrid ARMs have widened 1 to 11 basis point (see chart below).  The widest spreads can be found in G2 5/1s with 2/2/6 cap structures (11 bps) and FNMA/FHLMC 5/1s with 5/2/5 cap structures (10 bps).

Fannie Mae and Freddie Mac 5/1s have widened 25 basis points since the start of 2018.  Much of the spread widening can be attributed to lower tail valuations because of fast prepayment speeds at the first reset date, as well as fixed-rate mortgage spread widening.  However, this trend could reverse as front-end rates move lower.  As of today, 12-month LIBOR is down 18 basis points from its peak of 3.14 on November 9th.  Furthermore, new issue ARM borrowers are paying considerably higher weighted average coupons than several years ago (see chart below), and as a result will face less of a rate shock at the first reset date than today’s pre-reset borrowers are facing.

Last week, ARM activity was spread across a variety of lists and primarily focused on the following:

The following chart reflects the two-week change in LIBOR option-adjusted spreads for ARMs. With the exception of some short-reset bonds, OAS widened for GNMA, FNMA, and FHLMC.

Ricky Brillard, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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