ARM Update

September 30, 2019

Last week, yield spreads between hybrid ARMs and Treasurys were mixed with Ginnie 2s widening approximately 2 to 3 basis points and conventionals tightening approximately 1 or 2 basis points.  Mortgage-related sectors were also mixed with 15-year fixed-rate mortgages tightening 1 basis point and 30-year fixed-rate mortgages widening 2 basis points.  The broader bond market moved up in price, sending yields lower across the curve as weak data and political uncertainty offset positive trade developments.  We continue to see relative value in longer-reset 7/1s and 10/1s as they remain approximately 34 bps wider 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 160.9mm in new issue ARM selling split amongst Fannie Mae (8.9mm) and Freddie Mac (152mm).  Supply was focused in 7/1s with Freddie Mac issuing 73.7mm and Fannie Mae issuing 6.8mm.  Freddie Mac also contributed to longer-reset 10/1 issuance with 60.2mm.  With 617mm originated month-to-date, September’s ARM issuance levels have exceeded August’s levels with 1 business day remaining in the month.  ARM gross issuance remains at multi-year lows as it will likely come under 1 billion for the fifth consecutive month in September.

Hybrid ARM issuance remains quite low.  The monthly net supply of ARMs continues to run at a negative $2-3 billion pace, while fixed rates are expected to grow at $20-30 billion each month for the rest of the year.  As of September, hybrid ARM issuance represents ~ 0.75% 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 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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