ARM Update

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:

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

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
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120