ARM Update

September 11, 2017



Yield spreads for new-issue hybrid ARMs to Treasuries widened 5 bps as the overall bond market experienced a rally in price due to geopolitical events and dovish commentary from several Fed speakers.  The 10-year Treasury fell to 2.039% on Thursday, the lowest closing yield since 1.85% on the day of the presidential election.

Activity in the market was focused on seasoned GN 5/1 2.50’s, new issue GN 3/1 2.00’s, and investors seeking bids due to the bond market rally.  The more meaningful widening of spreads in ARMs compared to fixed-rate MBS increased demand for longer-reset new issue hybrid ARMs. New issue 7/1s pick up approximately 20 bps of OAS compared to 15-year MBS.

Hybrid ARM issuance during August declined $747mm, or 22% from the previous month.  The decline could be seen consistently among all reset-types.  The average rate for a 30-year fixed rate mortgage declined from 3.86% in July to 3.77% for August.  The modest change in long-term rates suggests the reduction in issuance was likely due to the impact of seasonality.  Total issuance of $2.7bn in August was 50% higher than the same month during 2016.

The prepayment report for August was released last week. In aggregate, FNMA prepayment speeds accelerated by approximately 6% for hybrid ARMs and 9% for fixed-rate MBS.  Technical factors were the likely cause as August had three more business days than July (15% increase).  Importantly, seasoned post-reset speeds were approximately 25CPR, and have remained relatively stable for the past 6 month.

 








Metrics for some commonly traded structures are below:






 



 


Michael S. Erhardt, CPA

Senior Vice President

Investment Strategist

Vining Sparks, IBG

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120