May 20, 2019
For the second consecutive week, demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 4 bps. The broader bond market moved up in price, sending yields lower across the curve. ARMs lagged their fixed-rate MBS counterparts, with yield spreads widening 1 bp on the 15-year fixed and unchanged on the 30-year fixed. We continue to see relative value in ARMs as they remain 11 to 26 bps wider compared to levels in early December.
The ARM origination cycle continued last week, with 393.1mm in new issue ARM selling split amongst Fannie Mae (151.8mm), Freddie Mac (212.5mm), and Ginnie Mae (28.8mm). Supply was focused in Freddie Mac 10/1s (111.4mm) and Fannie Mae 7/1s (84.7mm). Freddie Mac also contributed to gross issuance with 71.7mm in 7/1s and 29.4mm in 5/1s. Last month, ARM issuance levels totaled $1.5bn, a level not reached since May 2018.
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 9.5% +300 traded at a moderate premium ($102+).
- Seasoned Fannie Mega 7/1s with lower coupons (2.8%+) and ~ 66 months to reset traded at a slight premium. There has been demand in 7/1 ARMs recently after the double digit widening in spreads that occurred into the rate rally.
In new issue space, 10/1 hybrids are attractively priced with spreads in the mid-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 mid-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. 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