October 30, 2017
Yield spreads for new-issue hybrid ARMs to Treasuries were unchanged for the week. Most sectors have experienced some level of spread tightening since early September in connection with the backup in interest rates. ARMs have generally seen less contraction than other sectors and the wider valuations have attracted investors that typically purchase 10- to 15-year fixed- rate MBS. The modest curve steepening that took place mid-week (2/10s spread of 85 bps) also attracted buyers to this sector.
Activity during the previous week was primarily focused on the following:
- New issue 7/1s and 10/1s. Both reset types offer similar yields to a 15-year 3.00% MBS, an OAS pickup of approximately 10-15 basis points, with less extension risk.
- New issue GN 3/1 2.00’s and 5/1 2.50’s (GN 5/1s are compelling vs conventional counterparts because of wider valuations, which represent the underlying cap structure)
- Odd-lot clean up trades (adds liquidity and potentially higher yields)
Metrics for some commonly traded structures are below:
Michael S. Erhardt, CPA
Senior Vice President
Vining Sparks, IBG