September 4, 2018
Seasoned ARM spreads have widened over the past few weeks as a result of the heavy seasoned bond selling. Some of this has been justified as the market prices in faster prepayments at the first reset date. However, longer reset ARMs have also widened, which should be less impacted by at-reset speeds due to their lower dollar price and longer time to reset. On a relative basis, longer reset ARMs offer attractive OAS versus other shorter duration MBS.
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 – 5/1s in general look on the tighter side, as spreads are only slightly wider versus the beginning of the year (adjusting for dollar price)
- Fannie 7/1s maturing in 30-years with 79 to 80 months-to-reset (MTR) traded above par as spreads are wider
- G2 5/1 3s and 3.5s maturing in 30-years with 59 to 62 months-to-reset (MTR) traded above par – These bonds have the potential to widen into a 50bp selloff and 50bp rally
- Swaps and portfolio cleanups for underperforming bonds sold in 2012 and 2013 and reinvested at higher rates
August origination supply is set to total 1.2 to 1.3 billion, a slight pickup from July driven mainly by increased G2 5/1 issuance. Based on issuance levels, new issue supply should remain light into the fall and winter, barring a material curve steepening.
The following chart reflects the week over week change in LIBOR option-adjusted spreads for ARMs. GNMA ARM OAS’s tightened, while FNMA and FHLMC OAS’s tightened on shorter resets and widened on resets greater than 5 years.
Ricky Brillard, CPA
Vining Sparks, IBG