CMO Market Update
April 18, 2022
CMO activity was lighter than usual last week ahead of Thursday’s early close and the holiday weekend. One structure that saw decent demand was a 3.0% PAC off FNCL 4.0% collateral. Yield Book projects a WAL of 4.3 in the base case, with minimal extension in rising rates scenarios (around 5 years +300 bps). As mentioned in recent updates, investors have moved up the coupon stack as Treasury yields continue to rise. These higher coupon opportunities will continue to move quickly until supply has a chance to catch up.
Below are the Treasury and CMO sections from last week’s Investment Alternatives Matrix. On a yield basis, this sector remains attractive when compared to the last two years. As discussed in the monthly trade summary (below), projected yields on new CMO purchases have reached new highs in each of the last few months, and now are trending toward 3.0%.
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Monthly Trade Summary
Projected yields on customer purchases rose above 2.50% last month, a new high since 2020. This came with some extension out on the curve, but still well within historical norms. The biggest change in customer buying patterns has been continued migration up the coupon stack. Most customer activity in this sector is taking place in the 2.50% – 3.00% coupon range, with still a decent amount of trades in 2.00% – 2.25% coupon bonds. This is in stark contrast to activity seen in 2020 and most of 2021, when 1.00% coupons and lower were in high demand as investors took a defensive stance towards prepayment risk.
March was yet another month in which fixed-rate coupons dominated CMO activity. However, the trade desk saw floating-rate activity increase for the second consecutive month, up to 12%. In terms of structure, Sequentials outpaced PACs, accounting for over 70% of trades.
While multifamily collateral is not included in the data below, it is still noteworthy that there was strong customer demand for CMBS product last month, particularly Freddie Ks and Fannie Mae Aces. For market data and analytics on sectors and product types, please see our weekly Investment Alternatives Matrix.
Travis Nauert, CFA
Analyst, Investment Strategies