May 29, 2018
Yield spreads between hybrid ARMs and Treasuries widened slightly last week, 2bp or so on average. It was a fairly active week for ARMs relative to the quiet across the balance of the bond market with continued seasoned selling, mostly in longer reset pools with lower coupons, supplementing the ongoing demand for current production pools.
Last week, activity largely consisted of the following:
- New issue conventional 5/1s – Offer higher OAS levels and superior total return profiles with rising rate scenarios versus shorter-duration fixed-rate alternatives. Their minimum prepayments speeds tend not to drop to as slow a speed as fixed-rate MBS if rates rise, resulting in more stable cash flows.
- Seasoned 7/1s – 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 1 to 2 years of seasoning and the 5/2/5 caps structures. These structures offer compelling value versus new issue 5/1s, as they are trading at wider spreads.
- GN 3/1 2.5s – Recently trading modestly under par with spreads widening due to the cap risk.
- GN 5/1 3.0s – Current coupon trading near par.
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG