June 3, 2019
For the fourth consecutive week, demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 2 bps. The broader bond market moved up in price, sending yields significantly lower across the curve. ARMs lagged their fixed-rate MBS counterparts, with yield spreads tightening 2 bps on the 15-year fixed and 5 bps on the 30-year fixed. We continue to see relative value in ARMs as they remain 12 to 29 bps wider compared to levels in early December.
The ARM origination cycle continued last week, with 113.7mm in new issue ARM selling split amongst Fannie Mae (4.4mm), Freddie Mac (74.6mm), and Ginnie Mae (34.7mm). Supply was focused in Ginnie Mae 5/1s (34.7mm) and Freddie Mac 10/1s (27.8mm). Freddie Mac also contributed to gross issuance with 24.8mm in 5/1s and 22mm in 7/1s. After strong issuance last month, ARM issuance levels were light last month totaling 631mm.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- Seasoned Ginnie 3/1 2s with ~ 7 to 19 months to reset traded at a slight premium.
- New issue Fannie Mega 10/1s with higher coupons (3.6%+) and ~ 9-year resets traded at a moderate premium ($103+).
- Seasoned Freddie Giant 7/1s with ~ 3.2% WACs and ~ 50 months to reset traded near par.
In new issue space, 10/1 hybrids are attractively priced with spreads in the low-70s. 10/1 borrowers are paying ~25 bps higher in rate compared to a 7/1 borrower for the 3 extra years of fixed rate period, and as a result these borrowers likely intend to be in their loans for longer than 5/1 or 7/1 borrowers. This was reflected in April 2019 prepayment speeds:
5/1 Hybrid ARM 29.0 CPR
7/1 Hybrid ARM 23.5 CPR
10/1 Hybrid ARM 15.8 CPR
As you can see, 10/1s have paid slower and they offer the widest spread with spreads in the low-70s (~36 bps wider than a year ago).
The desk continues to look to bid odd-lot positions for clean-up. The disposition of odd-lot positions can result in enhanced transactional liquidity and higher earnings. Also, this is an opportunistic time to consider eliminating smaller line items that are subject to standard safekeeping and accounting fees that are more palatable for larger block sizes.
The following chart reflects the two weeks change in Z-spreads for ARMs. Z-spreads widened for GNMA, FNMA, and FHLMC products.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP