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%.

For those with login credentials to our Client Access portal, March month-end pricing and analytics are available on the website. If you do not have access, but would like to register, please click here.

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

Vining Sparks

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2022
This is a publication of Vining-Sparks IBG, LLC
775 Ridge Lake Blvd., Memphis, TN 38120