May 13, 2019
Demand for new-issue hybrid ARMs slowed last week, which resulted in yield spreads to Treasuries widening 1 to 5 bps. The broader bond market moved up in price, sending yields lower across the curve. ARMs outperformed their fixed-rate MBS counterparts, with yield spreads widening 5 bps on the 15-year fixed and 4 bps on the 30-year fixed. We continue to see relative value in ARMs as they remain 10 to 24 bps wider compared to levels in early December.
The ARM origination cycle continued last week, with 124.6mm in new issue ARM selling split amongst Fannie Mae (48.2mm), Freddie Mac (50.4mm), and Ginnie Mae (26mm). Supply was focused in Ginnie Mae 5/1s (23.1mm) and Freddie Mac 7/1s (21.5mm). Fannie Mae also contributed to gross issuance with 17.3mm in 5/1s, 17.5mm in 7/1s, and 13.4mm in 10/1s. Last month, ARM issuance levels totaled $1.5bn, a level not reached since May 2018.
For the third consecutive month, prepayments for conventional hybrid ARMs increased. May-released factors indicated that April ARM prepayments increased 13.68% to 18.78% for all three agencies. In aggregate, Fannie ARM speeds increased 2.9 CPR to 24.1, Freddie rose 3.2 CPR to 23.0, and Ginnie increased 4.3 CPR to 27.2. ARM prepayment speeds increased last month, but not at the faster speeds seen in the mortgage-back sector.
Shorter-reset LIBOR-based Fannie 3/1s increased 2.0 CPR to 24.6 and 5/1s increased 2.2 CPR to 29.0. Longer-reset 7/1s increased 3.4 CPR to 23.5 and 10/1s increased 4.6 CPR to 15.8. In the Ginnie sector, Treasury-based 3/1s, 5/1s, and 7/1s paid 30.0 CPR (+14.07%), 25.1 CPR (+24.88%), and 22.5 CPR (-29.02%), respectively.
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 at a moderate premium ($102+).
- New issue Fannie Mega 10/1s with higher coupons (3.6%+) and ~9-year resets traded at a moderate premium ($102+).
In new issue space, 10/1 hybrids are attractively priced with spreads in the low-60s. 10/1 borrowers are paying ~25 bps higher in rate compared to a 7/1 borrower for the 3 extra years of fixed rate period, and as a result these borrowers likely intend to be in their loans for longer than 5/1 or 7/1 borrowers. This was reflected in April 2019 prepayment speeds:
5/1 Hybrid ARM 29.0 CPR
7/1 Hybrid ARM 23.5 CPR
10/1 Hybrid ARM 15.8 CPR
As you can see, 10/1s have paid slower and they offer the widest spread with spreads in the low-60s (~28 bps wider than a year ago).
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 were mixed for GNMA, FNMA, and FHLMC products.
Ricky Brillard, CPA
Senior Vice President, Investment Strategies
Vining Sparks IBG, LP