March 4, 2019
Yield spreads on hybrid ARMs to Treasuries tightened approximately 1 to 2 basis points last week, which was the result of a modest bond market sell-off that generally sent yields higher across the curve. 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.
Last week, new-issue ARM flows were light with new-issue ARM selling primarily from Freddie Mac (150.2mm). Supply was focused in Freddie Mac 7/1s (71.6mm) and 10/1s (45.8mm). The recent selloff and mortgage tightening bodes well for ARM demand during the origination cycle, particularly given the attractive spreads in the sector.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- New issue Ginnie 5/1 3.5s with ~ 5 years to the reset and price volatility less than 9% +300 traded near the 101 handle.
- Seasoned Freddie Giant 5/1s with coupons exceeding 2.75% traded at a moderate premium ($101+).
- New issue Freddie Giant 10/1s with gross WACs ~ 4% and high yields (3%+ in the base case) traded near the 101 handle.
Traders have had success winning bid lists in recent weeks. Traders have also been active with odd-lot transactions. ARMs with factors less than .20 seem to be good swap candidates. The disposition of odd-lot positions can result in enhanced transactional liquidity and higher earnings.
The following chart reflects the week over week change in Z-spreads for ARMs. With a couple of exceptions, Z-spreads widened for GNMA, FNMA, and FHLMC products.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP