October 15, 2018
Yield spreads between hybrid ARMs and Treasuries widened slightly last week, 1 bp or so on average, reflecting lower prices and underperformance. ARM origination was limited as the focus remained on fixed-rate activity although origination should pick up towards the end of the week. Given the large rate move this month, it will be interesting to see how the ARM sector trades this cycle. Extension concerns have pushed fixed-rates wider in October. However, lower dollar prices, muted net issuance, and a slowdown in short reset ARM speeds in September should serve as a tailwind for ARMs heading into the origination cycle.
Last week, ARM activity was spread across a variety of lists and primarily focused on the following:
- 5/2/5 cap structure Fannie Mega 5/1s with reset dates inside of 12 months and gross WACs near 3.3% traded at a moderate premium
- Seasoned Freddie Mac 7/1s with reset dates inside of 24 months and gross WACs near 2.79% traded near par
Also, Fannie Mega 10/1s with slightly less than 10 years to the reset traded near par. 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.
Ricky Brillard, CPA
Vining Sparks, IBG