ARM Update

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:



Metrics for some commonly traded structures are below:

Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120