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Project loan spreads tighten as supply dries up

| October 19, 2018

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Ginnie Mae project loans have performed very well since the beginning of September. Demand for project loans increased throughout the summer, as relatively range-bound interest rates brought some investors back to the sector. However, collateral supply plummeted in September, which caused spreads to tighten significantly. Investors should consider whether it would be better to look for alternatives before adding to positions.

Refinance volumes are lower

The supply of new project loans, shown in Exhibit 1 (below), has fallen over the last three months. September issuance was roughly 40% below August, and overall Q3 supply was 22% below Q2. The drop in issuance was primarily due to a decline in refinancing caused by higher interest rates. Refinance issuance was extremely low in July and September, which were the two lowest months in the last year.

Exhibit 1: Refinance originations are falling

Source: Ginnie Mae, eMBS, 1010data, Amherst Pierpont Securities

Spreads are significantly tighter

Demand for project loan collateral has remained strong, pushing spreads tighter as supply weakened. Exhibit 2, below, shows that spreads to swaps have tightened 17 basis points since late August, coinciding with the much lighter supply in September. These spreads make project loan collateral look very rich relative to where it traded mid-summer.

Exhibit 2: Spreads tightened 17 bp since late August

Source: Bloomberg, Amherst Pierpont Securities

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