July 30, 2018
Demand picked up in ARMs last week, as investors purchased new-issue ARMs. The basis has tightened in July, which has richened relative value versus fixed-rate MBS. Furthermore, negative net issuance resulting from the flatter curve should be supportive of spread tightening in ARMs. Gross supply for July is only up to $1 billion, a significant decrease relative to the $3.4 billion issued during the seasonal peak last July.
Tighter fixed-rate valuations, a 10-basis point selloff in rates, and lower issuance have all served as a tailwind for the ARM sector in July, and as a result, ARMs have rebounded from the 2018 wides in late June. Further upside should continue for the ARM sector, particularly if demand for 15 years and other short-duration mortgage product continues.
Last week, activity was primarily focused on the following:
- 26- to 33-MTR Freddie Mac 5/1s with WACs in the 2.95-3.25% range, trading just above par
- 60- to 69-MTR Freddie Mac 7/1s and 10/1s with WACs in the 2.85-3.50% range, trading between 98 and 99.85 – The discount dollar prices mitigate prepayment risk. With 60+ months-to-reset, these bonds offer an appealing cash flow profile.
- ~5-year seasoned Freddie Mac 7/1 Giant with 29-MTR, trading just above par – The bond 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.
- Seasoned Fannie Mae 7/1s with 63 – 69 MTR traded between 99 and 100.25
- Bids on odd lot conventional and Ginnie ARMs, especially the seasoned product
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA ARM OAS’s widened, while FNMA and FHLMC OAS’s tightened.
Ricky Brillard, CPA
Vining Sparks, IBG