CMO Market Update

April 13, 2020

CMO spreads tightened again last week, but are holding up well compared to the MBS space as Fed purchases continue to have a more dramatic effect on spreads for 15- and 30-year passthroughs. Again, while the Fed is not purchasing CMOs, ultimately the Fed’s MBS purchases will have an effect on new issuance in the CMO space. With that said, investors looking for additional spread from amortizing product should find value in Agency CMOs.

Investors might also consider CMBS product, but, as a reminder, the Fed has stepped into that sector with plans for more intervention this week. Specifically, the Fed will buy over $1.0B in DUS paper, in additional to Ginnie Mae Project Loans.

In case you missed our MBS Prepayment Commentary last week, April factors were released reflecting activity in March. Speeds increased markedly from February, mainly due to timing. However, prepayments are expected to drop off going forward as home sales and refi-activity grind slower due to the coronavirus outbreak. Investors can still take additional measures to protect the portfolio against prepayments, such as investing in “cut” coupons to lower the dollar price and offer some downside protection. That does come at the expense of rates moving higher, but this is not a huge concern in the current environment.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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