March 25, 2019
Yield spreads between hybrid ARMs and Treasuries widened 1 to 2 bps last week, despite the second straight week of spread tightening experienced in fixed-rate MBS. ARMs underperformed their fixed-rate MBS counterparts, with yields tightening on this product approximately 1 to 7 basis points for the week. ARM spreads have been relatively stable partially because of the lack of supply in the market.
The ARM origination cycle continued last week, with 433.4mm in new issue ARM selling primarily from Fannie Mae (215.7mm). Supply continued to be focused in Fannie Mae 7/1s (167.8mm) and Freddie Mac 7/1s (86.2mm). Freddie Mac contributed to gross issuance with 57mm in 5/1s 45.7mm in 10/1s. Fannie Mae and Ginnie Mae also contributed to 5/1 issuance with 30.3mm and 28.5mm, respectively. 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:
- Seasoned Ginnie 3/1 2s with ~ 19 months to reset traded at a slight discount.
- New issue Ginnie 5/1 3.5s with ~ 58 months to reset traded at a moderate premium ($102).
- New issue Freddie Giant 7/1s with ~ 3.3% WACs and ~ 33 months to reset traded near the 101 handle. With interest rates down, ARMs (especially 7/1s and 10/1s) offer attractive yields with minimal extension risk and stable cash flows.
The desk continues to look to bid odd-lot positions for clean-up. The disposition of odd-lot positions can result in enhanced transactional liquidity and higher earnings. Also, this is an opportunistic time to consider eliminating smaller line items that are subject to standard safekeeping and accounting fees that are more palatable for larger block sizes.
The following chart reflects the week over week change in Z-spreads for ARMs. Z-spreads widened for GNMA, but tightened for FNMA and FHLMC products.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP