March 18, 2019
There was increased demand for hybrid ARMs last week, which caused yield spreads to Treasuries to tighten 1 basis point. The tightening move came after spreads were largely unchanged for the last month, lagging the performance of fixed-rate MBS, which have tightened at a much more aggressive rate.
The ARM origination cycle continued last week, with 93.3mm in new issue ARM selling primarily from Fannie Mae (50.4mm). Supply continued to be focused in Fannie Mae 7/1s (37.2mm) and Ginnie Mae 5/1s (23.8mm). Fannie Mae contributed to gross issuance with 4.9mm in 5/1s and 8.3mm in 10/1s. Freddie Mac also contributed to gross issuance with 8.6mm in 5/1s and 6mm in 7/1s. ARM issuance levels increased between December 2018 and January 2019 but have experienced a slow down since February 2019.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- New issue Ginnie 5/1 3.5s and 4s with ~ 5 years to reset traded at a moderate premium ($102+).
- Seasoned Fannie Mega 7/1s with lower coupons (2.7%+) and 5/2/5 cap structures traded at a slight premium.
- Seasoned Fannie 10/1s with higher coupons (3.2%+) and ~ 9 years to reset traded a moderate premium ($101+). Currently, hybrid 10/1s offer appealing yields and an attractive risk/reward profile.
The following chart reflects the week over week 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