June 18, 2018
The strength of the fixed-rate MBS basis to start the week boded well for ARMs, as the sector widened out in sympathy with fixed rates at the end of May and the beginning of June. If MBS continue to trade well and rates remain rangebound, ARMs should follow suit and retrace some of the recent widening.
Investors were relatively active in ARMs last week, especially the selling of slightly seasoned 7/1s. 56.3M of 7/1 Freddie Mac pools trade for June settle with WACs ranging from 3.187% and 3.638%. Also, 75.2M of 7/1 Fannie Mae pools trade for June settle with WACs ranging from 3.623% and 4.282%.
From a valuation standpoint, par handle seasoned 5/1s that are approximately 2 years to the reset are relatively attractive. With prices so low, prepayments will have minimal impact and in 2 years, these bonds will reset north of a 4% coupon (assuming 12-month LIBOR is unchanged). The 2/2/5 cap structures and low current weighted average loan balances also contribute to this opportunity within the ARMs market.
Activity last week was also focused on the following:
- 3.4M of 37 MTR 3/1 Ginnie Mae II pools for June settle with WACs ranging from 2.9% and 3.25%
- 7M of 61 MTR 5/1 Ginnie Mae II pools for June settle with a 3.432% WAC
- 1M of 115 MTR 10/1 Fannie Mae pools for June settle with a 3.845%
Despite the activity, ARMs have traded relatively sideways into the recent tightening in spread products, and higher coupon origination has widened a touch into the rally.
Ricky Brillard, CPA
Vining Sparks, IBG