May 8, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries remained stable last week. Demand for ARMs has improved in recent weeks primarily due to wider spreads relative to earlier in the year. Spreads have widened in part because of a pickup in new issue supply. The trend in heightened issuance can be seen on the graph below.
Activity last week was once again focused on longer reset types (7/1s and 10/1s). Valuations have now returned to historically normal levels and 7/1s and 10/1s offer 10 to 15 bps of yield spread over 15-year 3.00% MBS. We also observed decent demand from investors for 3/1 2.0s.
As shown on the graph below, total issuance for hybrid ARMs increased 34.0% during April to $2.5bn. This was the largest level of issuance since November 2015. The upward trend reflects the fact that borrowers have opted for lower rate alternatives since the post-election spike in long-term fixed rate mortgage rates. Issuance from FNMA & FHLMC totaled $2.1bn, which was an increase of 26.5% or $430.6mm from the previous month. Conventional issuance was again almost exclusively tied to LIBOR. GNMA issuance increased 90.0% to $411.0mm for the month. Robust growth in issuance occurred among all of the various reset types, but borrowers continued to favor 7/1s (42% of total issuance). 3/1s experienced an increase of 41.5% or $60.0mm from March, 7/1s increased 39.0% or $180.0mm, while issuance on 10/1s increased 45.1% or $184.2mm during April.
Hybrid ARM prepayments slowed slightly in April, but remained somewhat elevated due to seasonal factors. In aggregate, Fannie ARM speeds slowed 0.8CPR to 21.8CPR. LIBOR-based Fannie 5/1s declined 0.8CPR to 26.2CPR, 7/1s decreased 0.4CPR to 18.4CPR, and 10/1s declined 0.7CPR to 13.5CPR. A similar pattern could be seen in the Freddie space, as speeds overall declined 1.3CPR to 21.9CPR. For Freddie (LIBOR-based), 5/1s decreased 1.3CPR to 27.9CPR, 7/1s declined 0.2CPR to 17.6CPR, and 10/1s slowed 2.20CPR to 13.5CPR.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG