ARM Update

September 16, 2019

Yield spreads on hybrid ARMs to Treasurys tightened up to 10 basis points last week, despite most mortgage-related sectors experiencing some degree of spread widening.  The broader bond market moved down in price, sending yields substantially higher across the curve.  We continue to see relative value in longer-reset 7/1s and 10/1s as they remain approximately 32 and 37 bps wider, respectively, compared to levels in early March.

The following chart reflects the week over week change in Z-spreads for ARMs.  Z-spreads tightened for GNMA, FNMA and FHLMC products.

The ARM origination cycle was light again last week, with 55mm in new issue ARM selling split amongst Fannie Mae (50.9mm) and Ginnie Mae (4.1mm).  Supply was primarily focused in 7/1s with Fannie Mae issuing 35.1mm.  Fannie Mae and Ginnie Mae also contributed to 5/1 issuance with 12.2mm and 4.1mm, respectively.  ARM gross issuance remains at multi-year lows as it came under 1 billion for the fourth consecutive month in August.

Hybrid ARM issuance remains quite low.  As of September, hybrid ARM issuance represented ~ 0.50% of overall MBS issuance.  The ARM sector continues to be plagued with low supply and minimal new issuance.

Last week, ARM activity was spread across a variety of lists and primarily focused on the following:

On July 11th, the Alternative Reference Rates Committee (ARRC) released a white paper detailing how an average of the Secured Overnight Financing Rate (SOFR) can be used in newly-issued ARMs in a structure that is comparable to today’s existing ARM loans.  The white paper shows how SOFR can be used to develop products that are built on a robust reference rate that is grounded in market transaction.  Here’s an overview of the ARRC’s proposed models of SOFR ARMs:

The desk continues to look to bid odd-lot positions for both conventionals and Ginnies for clean-up.  The disposition of odd-lot positions can result in enhanced transactional liquidity and higher earnings.  Also, this is an opportunistic time to consider eliminating smaller line items that are subject to standard safekeeping and accounting fees that are more palatable for larger block sizes.

Ricky Brillard, CPA

Senior Vice President, Investment Strategies

Vining Sparks IBG, LP

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