October 2, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged for the second consecutive week, despite a broader bond market sell-off that resulted in tightening spreads across several sectors, including fixed-rate MBS. The backup in yields and cheaper valuations compared to fixed-rate MBS have made ARMs even more compelling from a spread and duration standpoint.
Preliminary estimates for issuance during September indicate that volumes totaled approximately $2.4bn, which is down $257.0mm from last month and nearly $1.0bn from July. The reduction in issuance/supply during September was likely the result of seasonality and the flatter yield curve. The 2/10 spread was 82 bps on average during September, compared to 88 bps during August. The rate differential between a 5/1 ARM and a 30-year mortgage narrowed from approximately 66 bps at the beginning of September to just 49 bps at the close of the month.
Activity in the market was focused on the following:
- New issue 7/1s. 7/1s offer similar yields as 3.00% 15-year MBS, but with less price risk and substantially better OAS profiles.
- Seasoned GN with a weighted average loan life of 80 months or greater (works well as the short-end of a barbell strategy)
- New issue GN 3/1 2.00’s
- 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