September 24, 2018
We saw new issue ARM origination last week across a variety of bid lists, focused in 7/1s. New issue spreads have lagged the performance of 15-year bonds over the past month despite the move to higher yields. We saw larger seasoned pool selling in 3 – 5-year seasoned 5/1s and 7/1s. Overall, these traded stronger than recent pricing points in the sector, suggesting spreads on seasoned ARMs have tightened considerably more than new issue into the selloff.
Last week, ARM activity was primarily focused on the following:
- 5/2/5 cap structure Fannie Mega 5/1s with 8 months-to-reset (MTR) and WACs near 3.25% traded at a moderate premium
- Fannie Mae 7/1s maturing in 30-years with resets in 2025 traded near par
- ~3-year seasoned Freddie Mac 10/1s with 80+ months-to-reset (MTR) traded at a slight discount
- Swaps and portfolio cleanups for underperforming bonds sold in 2012 and 2013 and reinvested at higher rates
Also, we moved seasoned Fannie Mae 10/1s with a 5/2/5 cap structure and approximately 30 months-to-reset (MTR) at a moderate premium. Because these bonds are so seasoned, the borrowers have seen multiple opportunities to refinance into substantially lower rates, yet they’ve been reluctant. Fully indexed, these bonds are approximately 15 bps over prevailing 30-year rates. Expect the refinance activity at reset to be muted compared to 5/1 or 7/1 hybrid ARMs with similar months-to-reset. These short duration bonds with attractive yields should outperform similar duration fixed-rate bonds in a rising rate environment.
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA, FNMA, and FHLMC ARM OAS’s widened reflecting lower prices and underperformance.
Ricky Brillard, CPA
Vining Sparks, IBG