ARM Update

June 5, 2017

Yield spreads for new-issue hybrid ARMs to Treasuries were 2 to 3 bps wider on the week, likely influenced by the recent pickup in issuance, which provided short-term relief to underwhelming supply in the sector. Hybrid ARM issuance for May remained elevated, with volumes totaling $3.2bn, an increase of 30.8% over the previous month.  Issuance was up in all reset categories, particularly in 7/1s, which increased $359.0mm to $1.40bn.

We continue to see consistent demand for longer reset structures. The relative attractiveness of new issue 7/1s and 10/1s has improved during the past few weeks as yield spreads have widened 3 to 5 bps, while spreads for 15-year fixed-rate product have generally tightened.  As outlined in the table below, 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

Investment Strategist

Vining Sparks, IBG

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