May 14, 2018
Yield spreads between hybrid ARMs and Treasuries were unchanged last week, underperforming fixed-rate MBS, which tightened 2 to 3 basis points in some of the shorter-duration products. The seasoned selling in the secondary market slowed last week as investors concentrated on buying newer production.
Last week, activity was primarily focused on the following:
- Conventional 7/1 3.0s – Increased demand as prices have declined below par.
- GN 3/1 2.5s – Recently trading modestly under par with spreads widening due to the cap risk.
- GN 5/1 2.5s – Trading slightly below par.
- Short Resets –Investors continue to target conventional short resets (6- to 18-MTR with 5/2/5 cap structures) to potentially benefit from further increases in market interest rates. In many cases, current prepayment activity shows the temporarily elevated levels common to bonds nearing their initial reset dates. However, based on historical patterns, prepayment activity generally declines after the bonds reset. Using a vector to model this behavior shows that seasoned short resets can compare favorably to other adjustable rate alternatives.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG