June 26, 2017
Demand for new-issue hybrid ARMs picked up last week, which resulted in yield spreads to Treasuries tightening 1 to 2 bps. This was a divergence from the recent trend in which ARMs under-performed fixed rates for most of the month because of heavy supply (issuance) and seasoned selling in the secondary market. Yield spreads have widened 7 bps during June and 25 bps since the end of February. As a result, dollar prices are actually lower despite a rally in interest rates over this time period.
The flatter yield curve and wider secondary spreads have made ARMs slightly less compelling for borrowers. The rate differential between a 7/1 and 30-year fixed mortgage narrowed from 59 bps during May to 50 bps in June.
We continue to favor longer resets (7/1s and 10/1s) as valuations remain relatively inexpensive and these structures compare favorably to 15-year MBS.
Activity last week included the following:
- GNMA 3/1 2.00%
- GNMA 5/1 2.50% (the lack of issuance in this space has reduced demand and prices have cheapened versus conventional counterparts)
- 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)
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG