June 25, 2018
Yield spreads between new-issue hybrid ARMs and Treasuries were 1 to 2 bps wider last week, while the curve flattened and yield spreads for fixed-rate MBS widened approximately 1 to 2 bps. Last week marked the start of the origination cycle in ARMs, as smaller pieces traded from a variety of servicers. Of the GSEs, FNMA saw the most activity with 54.5M in 3/1s trading for June settle with 4.309% WAC. Twenty million (20M) in 7/1s traded with 3.858% WAC. In seasoned space, we saw selling in 24 months-to-reset (MTR) Freddie Mac 5/1s, as 20.5M traded at just above par. We also saw 3.9M of Freddie Mac 7/1s trading for June settle with 3.187% WAC.
Last week, we saw buying in Fannie Mae 7/1s maturing in 2045 with a 3.395% WAC, which is an appealing story in the sector given the spread pickup to generic and loan balance 30 years. Given that valuations cheapened significantly in May, we are not surprised to see demand pick up for these structures.
Ginnie Mae ARMs saw a mix of buying and selling last week. On the buy side, 5/1 Ginnie Mae II Pools traded with a 2.873% WAC. On the sell side, 3/1s and 5/1s traded with WACs between 2.884% and 2.922%.
S-Curves on pre-reset ARMs have been extremely tame in 2018 (12-48 WALA 7/1s are paying 17CPR in 2018 at both a flat incentive to 30yrs and a -100bp incentive to 30yrs), and dollar prices on new production remain relatively low, so we think the relatively small spread tiering by WAC is justified.
Ricky Brillard, CPA
Vining Sparks, IBG