June 12, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries were 2 to 3 bps wider on the week, as the market adjusted to absorb the new supply from recent issuance and secondary selling.
As previously mentioned, we continue to favor longer reset structures. The relative attractiveness of new issue 7/1s and 10/1s versus other similar-duration products has improved during the past few weeks as yield spreads have widened, while spreads for 15-year fixed-rate product have generally tightened. New issue 7/1s and 10/1s offer similar yields as 3.00% 15-year MBS, but with less price risk and substantially better OAS profiles.
Prepayments on hybrid ARMs picked up during May, partially due to the higher date count (three more collection days compared to April) and the traditional impact from seasonality. For the most part the increase was slightly below that of fixed rates, which is a positive since turnover is typically higher in the ARMs space.
In aggregate, Fannie ARM speeds increased 3.0CPR (13.8%) to 24.8CPR. LIBOR-based Fannie 5/1s increased 3.1CPR to 29.3CPR, 7/1s were up 3.2CPR to 21.6CPR, and 10/1s accelerated by 2.6CPR to 16.1CPR. A similar pattern could be seen in the Freddie space, as speeds overall increased 3.8CPR (17.4%) to 25.7CPR. For Freddie (LIBOR-based), 5/1s increased 4.3CPR to 32.2CPR, 7/1s increased 3.3CPR to 20.9CPR, and 10/1s increased 1.70CPR to 15.2CPR. Ginnie ARMs increased at a similar pace as conventional hybrids during May, as prepayments rose 3.7CPR (15.7%) to 27.3CPR.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG