June 4, 2018
Flows were slower in ARMs last week with the focus on month-end. Spreads widened modestly in line with other MBS as a result of the risk-off rally.
Historically, ARMs have faced headwinds from prepayment risk as they approached $103-dollar price. However, given the selloff earlier this year, most new issue ARMs are still trading at much lower dollar prices. Originators have been raising rates to compensate for the lower dollar prices. Since new-issue ARMs are still trading 101-102 instead of 102-103 as they were last year, primary rates have further room to move higher.
Last week, seasoned G2 ARMs with a 5/1 reset type and 3% coupon were a focus. Also, we continue to see value in the season 7/1s and 10/1s in the 60-month to 70-month to reset part of the curve. These bonds can be purchased at a discount or very low pars, they eliminate any kind of prepayment risk, and they have no extension risk.
May adjustable-rate issuance of 3/1s, 5/1s, 7/1s, and 10/1s decreased by 16.3M to 1.51B, a slight decrease after last month’s first monthly increase since July 2017. Ginnie and Freddie issuance decreased, while Fannie Mae increased 9M. Ginnie issuance decreased 5.7M to 374.4M and Freddie decreased 19.6M to 387M after two months of positive issuance.
Ricky Brillard, CPA
Vining Sparks, IBG