ARM Update

October 1, 2018



It was a relatively quiet end to the quarter in ARMs.  Last week, we saw more Ginnie Mae II ARM origination, focused in 5/1 hybrids.  Gross issuance of adjustable MBS for the month came in at 1 billion, which was an approximate 300 million decline month over month.  Most of the decline occurred as a result of reduced Ginnie Mae II ARM issuance, which was elevated in August.  Overall, ARMs had a lackluster third quarter.  Despite rates selling off and fixed rate MBS trading well, 7/1 hybrid ARM spreads are roughly unchanged versus the beginning of the quarter.  As a result, ARMs look attractively priced heading into the fourth quarter.

Last week, ARM activity was spread across a variety of lists and primarily focused on the following:

Also, seasoned Fannie Mae 10/1s with a 5/2/5 cap structure and slightly less than 60 months-to-reset (MTR) at a moderate discount proved popular.  Dollar prices for conventional hybrid ARMs have been low for an extended period and generally, they have a higher minimum speed threshold, which translates into solid cashflows for the investor.  In some cases, hybrid ARMs have higher option-adjusted spread (OAS) versus their fixed-rate counterparts and an appealing yield given their lower price volatility.  Because hybrid ARMs reset off LIBOR plus a margin during the floating rate period, the investor is compensated with a higher coupon, which serves to mitigate extension risk.  Since the bonds will reset higher, the price of the bond at reset is historically in excess of par (~ $101 – $103.5).

The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA and FNMA/FHLMC with 32+ months-to-reset (MTR) tightened reflecting higher prices and outperformance.







 




Ricky Brillard, CPA

Strategist

Vining Sparks, IBG

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