March 19, 2018
Yield spreads between new-issue hybrid ARMs and Treasuries were unchanged last week, while the curve flattened and yield spreads for fixed-rate MBS tightened approximately 2 basis points. The 2-year/10-year Treasury spread declined 8 basis points for the week and is currently at 55 basis points. As previously mentioned, the lack of new supply due to the flattening trend has continued to support pricing in the sector. March issuance should be the lowest in over a year.
Last week, activity was primarily focused on the following:
- Short Resets – Investors are targeting conventional short resets (6- to 24-months to the reset date) to potentially benefit from further increases in market interest rates. In many cases, current prepayment activity shows the temporarily elevated levels common to bonds nearing their initial reset dates. However, based on historical patterns, prepayment activity generally declines after the bonds reset. Using a vector to model this behavior shows that seasoned short resets can compare favorably to other adjustable rate alternatives.
- GN 3/1 2.0s and 2.5s – 3/1 buyers are adding 2.0s at a discount and benefiting from the improvement in pricing for current coupon 2.5s trading just above par.
- GN 5/1 2.5s and 3.0s – 2.5s are trading just below par, while 3.0s are trading near $101-8 and offer slightly more protection in rising rate environments.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG