RBSGC recommends select agency and nonagency hybrid ARMs. In particular, RBSGC favors 7/1 agency hybrid ARM bonds over 5/1 hybrid ARMs. Both hybrids have 5/2/5 cap structures, however 7/1s offer the benefit of the curve as well as 10bp-20bp additional spread. RBSGC also suggests using nonagency hybrid ARMs as a vehicle for mortgage index investors to outperform. Nonagency hybrids do not qualify for index inclusion, and as a result, trade cheap relative to conforming mortgage product. Nonagency hybrids are prime quality collateral, and are issued in size from large, well-capitalized mortgage and banking institutions. They are fixed-rate, senior/sub structures, priced off swaps.
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