May 21, 2018
Yield spreads between hybrid ARMs and Treasuries were 1 to 2 basis points wider on the week, as the curve shifted higher, with intermediate- and long-term yields leading the way (10-year Treasury yield reached a seven-year high).
In the secondary market, we observed some seasoned selling in ARMs, primarily a mix of lower coupon, 60-70 MTR 7/1s and 10/1s. On the demand side, there was continued buying in new issue 5/1s and 7/1s, which has generally been the trend this month. Despite current coupon fixed-rate MBS cheapening during the past few months, new issue ARMs continue to offer relative value in terms of option-adjusted spread and price risk.
Last week, activity was primarily focused on the following:
- New issue conventional 5/1s and 7/1s – Marginally higher OAS levels and total return profiles with rising rate scenarios versus shorter duration fixed-rate alternatives.
- 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.
- Seasoned 7/1s and 10/1s – Investors have been drawn to these structures due to the selling in the secondary market, which has cheapened this sector. Investors are generally targeting pools with 60-70 MTR and 5/2/5 caps structures.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG