ARM Update

March 27, 2017

Adjustable Rate Mortgage Market Update

Yield spreads for new-issue hybrid ARMs to Treasuries were stable for the week, despite a bond market rally that led to Treasury yields falling across the curve.  Tight nominal spreads continue to reflect strong demand and negative net issuance.  In the secondary market there was heavy selling of seasoned hybrid ARMs (7/1s with 60 MTR) totaling ~$800mm that traded at a single digit z-spread basis.  This level is in-line with new issue 5/1s.   The seasoned selling has been well absorbed by the market, with valuations remaining relatively stable.

Activity last week was focused on:

According to the Mortgage Bankers Association data, the share of applications for mortgages taken for ARMs has reached a 2.5-year high, as borrowers now face higher fixed-rate alternatives.  The spread between the rate on a 30-year fixed-rate mortgage and the rate on a 5/1 is currently 85 bps, which is up from an average of 60 bps in 2016.  Recent trends in the spread between 30-year mortgage rates and hybrid ARMs can be seen on the chart below







Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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