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
Vining Sparks, IBG