CMO Market Update
April 11, 2022
Customers are active in the 3.00% – 4.00% coupon range as higher yields have pushed investors up the coupon stack. Still, depository insitutions have stuck to their sweet spot of bonds with a 3-5 year average life and remain mindful of extension risk in this rising rate environment.
As shown in the monthly trade summary analytics (provided below), projected yields on new purchases continue to climb. Last month, the average projected yield rose above 2.50%, another new high since the pandemic. Below are the Treasury and CMO sections from last week’s Investment Alternatives Matrix. It stands to reason we could see an average of 3.00% in this space barring a meaningful rally. This seems unlikely at the moment as even the long end of the curve sold off further last week.
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