ARM Update

September 23, 2019



Yield spreads on hybrid ARMs to Treasurys tightened 1 to 2 basis points last week, while most mortgage-related sectors experienced a mixture of spread tightening and widening.  The 15-year fixed-rate mortgage saw spreads widen 4 basis points and the 30-year fixed-rate mortgage experienced spread tightening of 3 basis points.  The broader bond market moved up in price, sending yields lower across the curve as the Fed lowered the target range for its policy rate 25 bps to 1.75% – 2%.  Looking ahead, the Fed’s policy action will be dependent on various growth and trade policy scenarios.  We continue to see relative value in longer-reset 7/1s and 10/1s as they remain approximately 30 and 35 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 were mixed for GNMA, FNMA, and FHLMC products.



The ARM origination cycle continued last week, with 323.2mm in new issue ARM selling split amongst Fannie Mae (85.5mm), Freddie Mac (225.7mm), and Ginnie Mae (12mm).  Supply was focused in 7/1s with Freddie Mac issuing 102.4mm and Fannie Mae issuing 54.9mm.  Freddie Mac also contributed to longer-reset 10/1 and 5/1 issuance with 86.6mm and 36.7mm, 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 represents ~ 0.68% of overall MBS issuance.  Nevertheless, issuance volumes have been at their highest levels in Ginnie Maes, followed by Freddie Mac and despite the meager volumes, September hybrid ARM issuance as a percentage of overall MBS issuance has trended slightly higher versus August.



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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