May 30, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries finished 1 to 2 bps wider on the week, possibly due to the increased level of supply. ARM originations totaled $2.8bn during May, an increase of 11% over the previous month.
Demand for new issue 7/1s and 10/1s was steady last week, and these structures remain attractive compared to fixed-rate MBS. Yield spreads for the fixed-rate MBS sector to swaps tightened 1 to 2 bps following the release of the FOMC minutes, which discussed the balance sheet reduction plan.
We continue to like new issue 3.00% 7/1s compared to 3.00% 15-year MBS. 3.00% 15-year MBS are projected to yield 2.23% with a price volatility of -13.50% assuming a +300 bps scenario. Alternatively, new issue 3.00% 7/1s are projected to yield 2.00%, but offer a much shorter duration, with price volatility of -10.50% in a +300 bps scenario. ARMs also outperform on an OAS basis, with 3.00% 7/1s showing 8 bps in Yield Book, which is 9.8 bps wider than 3.00% 15-year MBS.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG