ARM Update

July 15, 2019

Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 2 bps.  Minutes of the June FOMC meeting and the Fed Chairman’s testimony before Congress reinforced expectations for a rate cut at this month’s meeting, with several policymakers considering near-term easing to be appropriate.  The broader bond market was mixed with yields lower on the short-end, but higher across the rest of the yield curve.  ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 4 bps on both the 15- and 30-year fixed.  We continue to see relative value in ARMs as they remain 34 to 52 bps wider compared to levels in early December.

The following chart reflects the week over week change in Z-spreads for ARMs.  Z-spreads tightened for GNMA, FNMA, and FHLMC products.

The ARM origination cycle was light last week, with 58.4mm in new issue ARM selling split amongst Fannie Mae (36.5mm), Freddie Mac (1mm), and Ginnie Mae (20.9mm).  Like last week, supply was concentrated in Ginnie Mae 5/1s (20.9mm).  Fannie Mae also contributed to gross issuance with 16.3mm in 5/1s and 12mm in 10/1s.  June’s ARM issuance at 642.8mm was slightly higher than May’s originations (631.4mm), but issuance remains at multi-year lows.

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

Last week, the Alternative Reference Rates Committee (ARRC) released a white paper detailing how an average of the Secured Overnight Financing Rate (SOFR) can be used in newly-issued ARMs in a structure that is comparable to today’s existing ARM loans.  The white paper shows how SOFR can be used to develop products that are built on a robust reference rate that is grounded in market transactions.  Here’s an overview of the ARRC’s proposed models of SOFR ARMs:

Ricky Brillard, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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