November 5, 2018
Last week, buying picked up slightly in ARMs into the move to higher yields, although the volatile macro environment has caused some investors to take a pause in the sector. As it stands, ARMs are attractively priced at YTD wides in spread (see below) and close to YTD lows in dollar price.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- Seasoned Ginnie Mae II 5/1s with coupons around 2.5% and reset dates inside of 24 months traded at a slight discount as yields moved higher
- Freddie Mac 10/1 Giants with resets inside of 10 years and current weighted average loan balances less than 300k traded at a slight discount as yields moved higher
This time of the year we typically see balance sheet managers cleaning up odd-lot positions, selling low performing securities, and positioning their institutions for improved performance going forward. This year has been no exception. The disposition of odd-lot positions can result in enhanced transactional liquidity and higher earnings. Also, this is an opportunistic time to consider eliminating smaller line items that are subject to standard safekeeping and accounting fees that are more palatable for larger block sizes.
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA ARM OAS’s tightened on shorter resets and widened on resets greater than 33 months. FNMA and FHLMC OAS’s widened. Overall, ARM spreads remain at the wides of the year.
Ricky Brillard, CPA
Vining Sparks, IBG