ARM Update

May 7, 2018



Yield spreads between hybrid ARMs and Treasuries were unchanged last week, as the overall bond market traded in a relatively narrow range.  Seasoned bond selling in the secondary market continued last week, with most of this activity consisting of post-reset 5/1s.  Yields on post-resets have increased sharply this year as a result of 12-month LIBOR increasing from just 1.69% in early September 2017 to 2.77%.  Flows generally reflect the anticipation of faster prepayment speeds as borrowers’ interest rates adjust higher.

Issuance for April rebounded as expected and totaled $1.5bn, a 54.1% increase over the previous month.  The largest increase could be found in 7/1s, with volumes totaling $601.6mm, an increase of $200.4mm from the prior month. 7/1s continued to make up the largest reset type, accounting for nearly 40.0% of total originations. 3/1s declined $9.0mm to $151.2mm, accounting for a relatively small 10.0% of total production. The flatter yield curve and narrowing spreads between longer-term fixed rate options and the shorter resets has diminished consumer demand for the shorter reset types.

Hybrid ARM prepayments rose approximately 5% in April, roughly meeting expectations given the impacts from seasonality and higher sensitivity to turnover.  In aggregate, Fannie ARM speeds advanced 1.1CPR to 22.4CPR. Fannie 5/1s sped up 1.5CPR to 27.4CPR, 7/1s accelerated 1.2CPR to 19.4CPR, and 10/1s increased 0.5CPR to 14.0CPR.  There was a spike in prepayments in post-resets (5/1s at first reset date), as speeds hit 90CPR this month, up another 5CPR from last month.

 

Last week, activity was primarily focused on the following:

 








 

 

 



Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

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