ARM Update |  |
July 2, 2018
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs:
The contraction of primary/secondary spreads this year should help new issue ARM performance if rates continue to grind lower. In 2016, the dollar price on production coupon new issue 7/1s was generally ~103, and in 2017, new issue 7/1s hovered in the 102s. However, dollar prices are currently much lower. For instance, during the most recent origination cycle, the majority of 7/1s traded between par and 101. If a further risk-off rally were to materialize, faster prepayment speeds would be less detrimental to recently issued ARMs than in past environments given the lower premiums.
To start the week, flows were on the lighter side in ARMs, following the prior week’s busy origination cycle. Activity was primarily focused on the following:
- 54- to 60-MTR Fannie Mae 10/1s with WACs between 2.91% and 2.94% traded just below par
- 25-MTR Fannie Mae 5/1s with WACs between 2.79% to 2.95% traded just above par
- Freddie Mac 7/1 with a 3.7% WAC traded just above par
Right now, investors should consider new and moderately seasoned hybrid ARMs (i.e. 7/1s and 10/1s with 48-84 months to roll with 5/2/5 caps) for the following reasons:
- Dollar prices for conventional hybrid ARMs have not been this low in a long time.
- Hybrid ARMs generally have a higher minimum speed threshold, which means solid cashflow for the investor.
- Hybrid ARMs have an appealing OAS vs their fixed rate counterpart.
- Hybrid ARMs have an appealing yield given their lower price volatility.
- Because hybrid arms reset off Libor + a margin during the floating period, the investor
Ricky Brillard, CPA
Strategist
Vining Sparks, IBG