October 29, 2018
Last week, we saw activity focused in pre-reset 7/1 hybrid ARMs. This sector has been hampered by an increase in at-reset speeds, which has caused valuations on pre-reset 7/1s to cheapen by approximately 1.5 points this year. These speeds will likely continue because the 2012-2013 vintages that will be resetting in the next few years are facing an even higher rate shock compared to the 2011 borrowers. Hybrid ARM 7/1s are 15 bps wider versus the start of the year and 3-4 bps wider over the past couple of weeks. This widening has occurred despite supply continuing to trend lower, at below 1 billion per month. Hybrid ARM 7/1s offer compelling value versus 5/1s, as they trade at those wider spreads (see below).
In addition to seasoned 7/1s, ARM activity was spread across a variety of lists and primarily focused on the following:
- Seasoned Ginnie Mae II 5/1s with coupons around 2.5% and reset dates inside of 24 months traded at a slight discount
- 2/2/5 cap structure seasoned Fannie Mae 5/1s with reset dates inside of 24 months and a fully indexed rate in excess of 4.4% traded between par and a moderate premium
- Fannie Mae 7/1s with coupons around 3.75% and reset dates inside of 70 months traded at a moderate premium
- Freddie Mac 10/1s with weighted average loan balances less than 300k and gross weighted average coupons slightly less than 4% traded a slight discount
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA widened reflecting lower prices and underperformance. FNMA and FHLMC tightened reflecting higher prices and outperformance. Any recovery in risk assets should benefit ARM spreads, which have reached their widest spread levels of the year.
Ricky Brillard, CPA
Vining Sparks, IBG