January 8, 2017
There was increased demand for new-issue hybrid ARMs last week, which caused yield spreads to Treasuries to tighten 3 to 4 basis points. The tightening move came after spreads were largely unchanged for the entire month of December, lagging the performance of fixed-rate MBS, which have tightened at a much more aggressive rate. From a valuation standpoint, new issue 7/1s remain relatively attractive with a projected pickup of 10-12 bps of OAS over current coupon 15-year MBS. Investors were cognizant of this opportunity last week with over $200mm of new-issue 7/1s being traded in the secondary market.
As anticipated, issuance for December was relatively weak at $1.7 billion. This was the lowest month of supply since the end of 2016. Issuance is generally lower in the winter due to seasonal effects, but the flattening yield curve is also impacting production, as the spread between the rates on traditional fixed-rate mortgages and ARM products has been reduced. Approximately 70% of the supply in December was made up of 5/1s and 7/1s, with 7/1s leading all categories with $713mm in production.
The prepayments for December were released on Friday, and ARMs speeds slowed approximately 3%, which was similar to the slowdown in fixed-rate MBS. Speeds on FNMA and FHLMC ARMs printed modestly below 20CPR for the first time since February. In aggregate, FNMA ARM speeds were down 0.6CPR to 19.5CPR (3.0% decrease). LIBOR-based Fannie 5/1s decreased 0.9CPR to 23.1CPR, 7/1s declined 0.8CPR to 17.1CPR, and 10/1s rose 0.4CPR to 13.4CPR. Prepayments for LIBOR-based Freddie securities were similar, as 5/1s, 7/1s, and 10/1s paid 24.9CPR (0.8CPR), 15.8 CPR (1.5CPR), and 11.9CPR (.2CPR), respectively.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG