ARM Update

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:

 

 

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

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