July 16, 2018
ARMs flows were quiet last week but should pick up this week as the bulk of July origination comes to market. The fixed-rate basis has tightened versus Treasuries to start the month. New issue ARM spreads, on the other hand, have been stagnant to start the month, despite beginning at more attractive valuations following the widening and underperformance in June. New issue ARMs have underperformed fixed-rate MBS over the past few months despite lower prices on production coupons relative to the previous year. As a result, the best value is in new issue ARMs currently, with expectation for better investor appetite during this month’s origination cycle.
Last week, activity was primarily focused on the following:
- 63- to 84-MTR Freddie Mac 7/1s with WACs between 2.96% and 3.92%, trading between 98.5 and 101
- ~5-year seasoned Freddie Mac 7/1 Giants with 29-MTR, trading just above par – should be resetting up in coupon substantially over the next couple of years. Since the bond has a par handle, prepayments should have minimal impact.
- 80-MTR Fannie Mae 7/1 with 3.86% WAC, trading around 101
- ~3-year seasoned Fannie Mae 5/1 with 24-MTR, trading just above par – In a few years when coupons are annually resetting, these floaters with par handle book prices will be appealing.
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA ARM OAS’s contracted modestly, while FNMA and FHLMC OAS’s widened.
Ricky Brillard, CPA
Vining Sparks, IBG