October 10, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries were 2 to 3 basis points tighter for the week, which was similar to the moves in several sectors. However, ARMs have generally lagged the recent tightening experienced in MBS market. This makes ARMs standout from a relative value standpoint compared to fixed-rate MBS. ARMs also remain a compelling choice among investors because of the Fed’s plan to continue to hike interest rates.
Issuance and prepayments for September were released last week. As expected, issuance volumes declined by 9.6% or $258.0mm from the previous month, but were higher than the same month last year. Production for 3/1s improved while the other reset categories all declined. 7/1s remain the favorite among borrowers, making up 42.4% of all production, followed by 5/1s at 29.2%.
ARM prepayment speeds experienced a notable decline in September, reflecting the drop in day count. In aggregate, FNMA ARM speeds went down 3CPR to 21.1CPR. LIBOR based Fannie 5/1s dropped 3.2CPR to 25.8CPR, 7/1s declined 3.3CPR to 17.8CPR, and 10/1s fell 1.9CPR to 13.9CPR. Prepayments for LIBOR based Freddie securities behaved similarly as 5/1s, 7/1s, and 10/1s paid 27.3CPR (3.5CPR), 18.1 CPR (1.9CPR), and 14.1CPR (.7CPR), respectively. In aggregate, GNMAs underwent comparable changes, slowing by 12% to 21.1CPR.
Activity in the market was focused on the following:
- New issue 7/1s. 7/1s continue to offer similar yields as 3.00% and 3.50% 15-year MBS, but with less price risk and substantially better OAS profiles.
- New issue GN 3/1 2.00’s (trading at low dollar prices has attracted buyers)
- GN 5/1 2.50’s (trading at slightly wider spreads than conventional counterparts)
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG