ARM Update

July 22, 2019

Yield spreads between hybrid ARMs and Treasurys widened slightly last week, 1 bp or so on average.  US Treasury yields oscillated around firm data releases but dovish US Federal Reserve commentary.  The broader bond market moved up in price, sending yields lower across the curve.  ARMs lagged their fixed-rate MBS counterparts, with yield spreads tightening 1 bps on the 30-year fixed.  We continue to see relative value in ARMs as they remain 35 to 53 bps wider compared to levels in early December.

The following chart reflects the week over week change in Z-spreads for ARMs.  Z-spreads were mixed for GNMA products while FNMA and FHLMC products experienced tightening.

The ARM origination cycle continued last week, with 451mm in new issue ARM selling split amongst Fannie Mae (149mm), Freddie Mac (214.6mm), and Ginnie Mae (87.4mm).  Supply was focused in Freddie Mac 7/1s (96.1mm), and Ginnie Mae 5/1s (86.1mm), and Fannie Mae 7/1s (85.4mm).  Freddie Mac also contributed to gross issuance with 72mm in longer-reset 10/1s.  With 635.4mm originated month-to-date, July issuance matches or exceeds levels from the previous 2 months with 8 business days remaining in the month.

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 transaction.  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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