ARM Update

October 15, 2019

Demand for new-issue hybrid ARMs slowed, which resulted in yield spreads to Treasurys widening 1 to 2 basis points last week.  Hybrid ARM spreads tightened in September, but they’ve widened out in October bringing spreads back to multi-year wides.  The broader bond market moved down in price, sending yields substantially higher across the curve as US/China trade progress was enough to reverse course for risk assets and caused a selloff in Treasurys.  We continue to see relative value in longer-reset 7/1s and 10/1s as they remain approximately 37 bps wider compared to levels in early March.

The ARM origination cycle continued last week, with 248.5mm in new issue ARM selling split amongst Fannie Mae (156.7mm), Freddie Mac (32.4mm), and Ginnie Mae (59.4mm).  Supply was focused in 5/1s with Ginnie Mae issuing 58.4mm and Fannie Mae issuing 51.9mm.  Fannie Mae also contributed to longer-reset 7/1 and 10/1 issuance with 74.2mm and 58.4mm, respectively.  ARM gross issuance remains at multi-year lows as it came under 1 billion for the fifth consecutive month.

Hybrid ARM issuance remains quite low.  The monthly net supply of ARMs continues to run at a negative $2-3 billion pace, while fixed-rates are expected to grow at $20-30 billion each month for the rest of the year.  As of October, hybrid ARM issuance represents ~ 0.59% of overall MBS issuance.  Nevertheless, issuance volumes have been at their highest levels in Ginnie Maes, followed by Freddie Mac and despite the meager volumes, September hybrid ARM issuance as a percentage of overall MBS issuance trended slightly higher versus August.

September prepayments for hybrid ARMs decreased for Freddie Mac and Ginnie Mae, while remaining unchanged for Fannie Mae.  October-released factors indicated that prepayments decreased 4.04% for Freddie Mac and 2.22% for Ginnie Mae.  Fannie ARM speeds remained stable at 27.8, Freddie fell 1.1 CPR to 26.1, and Ginnie decreased 0.7 CPR to 30.9.

Shorter-reset LIBOR-based Fannie 3/1s decreased 5.9 CPR to 23.2 and 5/1s increased .1 CPR to 30.6.  Longer-reset 7/1s increased .6 CPR to 29.4 and 10/1s increased .3 CPR to 22.6.  In the Ginnie sector, Treasury-based 3/1s, 5/1s, and 7/1s paid 29.9 CPR (-4.78%), 31.7 CPR (+.32%), and 30.5 CPR (-26.33%), respectively.

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

On July 11th, the Alternative Reference Rates Committee (ARRC) released a white paper detailing how an average of the Secured Overnight Financing Rate (SOFR) can be used in newly-issued ARMs in a structure that is comparable to today’s existing ARM loans.  The white paper shows how SOFR can be used to develop products that are built on a robust reference rate that is grounded in market transaction.  Here’s an overview of the ARRC’s proposed models of SOFR ARMs:

The desk continues to look to bid odd-lot positions for both conventionals and Ginnies for clean-up.  The disposition of odd-lot positions can result in enhanced transactional liquidity and higher earnings.  Also, this is an opportunistic time to consider eliminating smaller line items that are subject to standard safekeeping and accounting fees that are more palatable for larger block sizes.

Ricky Brillard, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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