July 10, 2017
Z-spreads for new-issue hybrid ARMs have tightened by approximately 5 bps over the past two trading weeks. The broader bond market sell-off and steepening of the yield curve has caused prepay fears to diminish, which has helped ARM demand remain steady.
June prepayment speeds were released Friday (July 7th) and were up modestly for the second consecutive month. The increase was primarily a function of seasonality. In aggregate, Fannie ARM speeds increased 0.6CPR (2.42%) to 25.4CPR. LIBOR-based Fannie 5/1s increased 1.8CPR to 31.1CPR, 7/1s rose 1.0CPR to 22.6CPR, and 10/1s accelerated by 0.6CPR to 16.7CPR. A comparable pattern could be seen in the Freddie space, as speeds overall increased 1.0CPR (3.89%) to 26.7CPR. For Freddie (LIBOR-based), 5/1s increased 0.9CPR to 33.5CPR, 7/1s increased 2.1CPR to 23.0CPR, and 10/1s increased 0.30CPR to 15.5CPR. Prepayments on Ginnie ARMs decreased 1.9CPR to 25.4CPR.
Hybrid ARM issuance totaled $2.9bn for June, a decline of $340mm from the previous month. Despite the slight decline in issuance, levels remain strong compared to the beginning of 2017 and most of 2016. Total issuance for Q2’17 was $8.6bn, compared to just $4.6bn for the same period in 2016. 5/1s and 7/1s continue to make up a significant portion of originations, accounting for over 70% of issuance during the past two months.
Activity last week included the following:
- New issue 7/1s and 10/1s (offer similar yields as 3.00% 15-year MBS, but with less price risk and substantially better OAS profiles)
- Pre-reset 5/1s (prices have declined nearly one point during 2017, which has attracted investors)
- GNMA 3/1 2.00%
- GNMA 5/1 2.50% (the lack of issuance in this space has reduced demand and prices have cheapened versus conventional counterparts)
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG