October 16, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries were 1- to 2 basis points tighter for the week. The spread between the 2-year and 10-year Treasury declined 7 basis points last week and is currently at 78 basis points, after peaking at 136 basis points in December 2016 following the election. The flattening yield curve will likely continue to slow demand for ARMs. The graph below depicts the narrowing difference between rates on hybrid ARMs and traditional 30-year mortgages.
Strong demand for ARMs continues because of wider valuations versus other mortgage products. 15-year MBS remain at the tights of the year, while ARMs are approximately 10-12 basis points wider than earlier in the year.
Last week investors focused on seasoned pools with a weighted average loan age of 80 to 100 months. Post-reset speeds have recently stabilized, which has attracted buyers to the seasoned sector. Other activity included the following:
- New issue GN 3/1 2.00’s
- GN 5/1 2.50’s (have recently lagged the tightening relative to conventionals)
- New issue 10/1s. 10/1s offer higher yields than 15-year MBS and an OAS pickup of approximately 20 basis points
- Odd-lot clean up trades
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG