A new interdealer derivative index referencing spreads in the agency hybrid adjustable-rate mortgage market will launch in March and test runs will start this week.
Dubbed Hybrix, it will be administered by Markit Group. Contracts on the index will allow investors to go both long and short government agency bonds backed by adjustable-rate mortgages. The contracts will be cash-settled through theDepository Trust & Clearing Corp. and will reference the index spread rather than individual bonds. The index will initially reference 5/1 ARMs--mortgages that have fixed rates for the first five years and then annual adjustments--but will expand in the third quarter to 3/1 and 7/1 ARMs. A dealer poll will determine the weighted average coupon, opening spread, duration, fixed-rate payment and closing spread for the index every four months.
Agency hybrid ARMs are volatile and sensitive to interest-rate changes. Dealers believe that the index will offer a good proxy for sentiments in the interest-rate market in addition to views on housing credits. "This is another tool in addition to the ABX that lets people play housing mortgages directly," said a market maker for the new index.
Interest in ARMs has been growing in the cash market, too. Lehman Brothers has just announced plans to add Fannie Mae andFreddie Mac bonds backed by adjustable-rate mortgages to its U.S. Aggregate Index, which serves as a benchmark for money managers who oversee about USD2 trillion of assets. The change to the Lehman index, scheduled for April 1, is expected to significantly boost demand for the bonds, according to market participants.
