ARM Update

July 29, 2019

Yield spreads between hybrid ARMs and Treasurys tightened approximately 1 or 2 basis points last week, despite spread widening experienced in fixed-rate MBS.  The broader bond market moved down in price, sending yields higher across the curve.  This week, the focus will revert to the Federal Reserve, with the first rate cut in a decade widely anticipated by market participants.  As mentioned in previous updates, we continue to see relative value in ARMs as they remain 33 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 widened for shorter-reset Ginnies and conventionals, but tightened for longer-reset products (greater than 50 months-to-reset).

The ARM origination cycle was light last week, with 113.2mm in new issue ARM selling split amongst Fannie Mae (70.6mm), Freddie Mac (23.7mm), and Ginnie Mae (18.9mm).  Supply was focused in Fannie Mae 5/1s and 7/1s with 26.5mm and 29.5mm issued, respectively.  Ginnie Mae also contributed to gross issuance with 18.9mm in shorter-reset 5/1s.  With 748.6mm originated month-to-date, July issuance exceeds levels from the previous 2 months with 3 business days remaining in the month.

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

On July 11th, 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:

The desk continues to look to bid odd-lot positions for both conventionals and Ginnies for clean-up.  The disposition of odd-lot positions can result in enhanced transactional liquidity and higher earnings.  Also, this is an opportunistic time to consider eliminating smaller line items that are subject to standard safekeeping and accounting fees that are more palatable for larger block sizes.

Ricky Brillard, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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