March 11, 2019
Z-spreads for hybrid ARMs were 3 to 9 bps tighter on the week, compared to a modest tightening for fixed-rate MBS, amidst a rally in prices for the broader bond market. Hybrid ARM spreads tightened in the month of February, lagging the performance of fixed-rate MBS, which have tightened at a slightly more aggressive rate. Despite ARM spreads tightening recently, we continue to see relative value in ARMs as they remain 8 to 10 bps wider compared to levels in early December.
The ARM origination cycle continued last week, with 124.3mm in new issue ARM selling primarily from Fannie Mae (59.9mm). Supply was focused in Fannie Mae 7/1s (43.2mm) and Ginnie Mae 5/1s (26.8mm). Freddie Mac also contributed to gross issuance with 18.6mm in 7/1s. ARM issuance levels increased between November 2018 and January 2019 but experienced a decline in February 2019. The trend in lower supply has resulted in a modest tightening of spreads.
Prepayments for conventional hybrid ARMs increased for the first time since October 2018. March-released factors indicated that February ARM prepayments increased 1.6% to 7.69% for all three agencies. In aggregate, Fannie ARM speeds increased .3 CPR to 19.1, Freddie rose .5 CPR to 17.3, and Ginnie increased 1.5 CPR to 21.
Shorter-reset LIBOR-based Fannie 3/1s decreased 1.1 CPR to 22.1 and 5/1s decreased .40 CPR to 24, whereas longer-reset 7/1s increased 1.3 CPR to 17.8 and 10/1s increased 1.3 CPR to 10.9. In the Ginnie sector, Treasury-based 3/1s, 5/1s, and 7/1s paid 24.1 CPR (+12.09%), 18.5 CPR (+3.35%), and 18.7 CPR (+29.86%), respectively.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- New issue Freddie Giant 10/1s with ~ 4% WACs and ~ 9.5-years to reset traded near the 101 handle.
- New issue Fannie Mega 5/1s with lower coupons (2.5%+) and less than 1-year resets traded at a moderate premium ($101 – $102).
- New issue Ginnie 5/1 3.5s with ~ 5 years to the reset and price volatility less than 10% +300 traded near the 101 handle.
The following chart reflects the week over week change in Z-spreads for ARMs. Z-spreads tightened for GNMA, FNMA, and FHLMC products.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP