November 6, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged for the week, compared to a modest tightening for fixed-rate MBS, amidst a rally in prices for the broader bond market.
Last week investors focused on adding new issue GN 3/1 2.00’s, seasoned 7/1’s (60 months to the reset date), and new issue 10/1’s. New issue 7/1’s and 10/1’s continue to offer superior relative value compared to 15-year MBS, with a healthy pickup in OAS.
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. Extension swaps have also been a focus, as balance sheet managers have taken strategic losses to help improve performance in 2018. The projected yield on a new issue 5/1 hybrid ARM is approximately 80 bps higher than this time last year (2.10% vs 1.30%). Such higher-yielding reinvestment opportunities can help shorten the break-even period on swaps.
Issuance for October is shown on the graph below. The seasonal slowdown and flattening yield curve pulled down volumes by 12.3% or $295.4mm from the previous month, but were ~40% higher than the same month last year. Production for 5/1’s improved 2.6%, while the other reset categories all declined. 7/1’s remain the favorite choice among borrowers, making up 40.0% of all production, followed by 5/1’s at 34.0%.
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG