CMO Market Update
April 15, 2019
CMO spreads to Treasurys tightened for the first time in almost two months. Granted, it was a modest tightening of one basis point, leaving spreads just below recent highs reached in late March.
In terms of activity last week, the trade desk saw demand for 4 off of 4s front Sequentials, as well as coupon “cuts”. You may remember that we discussed coupon cuts in the CMO Update from March 25. Additionally, customers expressed renewed interest in VADMs after a quiet March for the product. Bonds with around a 5 year base case Weighted Average Life continue to be a sweet spot for depositories, duration and cashflow wise, as has traditionally been the case.
In case you missed it, please find the March Trade Summary below.
March Trade Summary
Generally speaking, CMO trades in March, and Yield Book analytics on bonds traded, were reminiscent of activity late last year. The notable exception: projected yields are down and 3% yields are more difficult to earn.
- Customers invested in Fixed-rate coupons
- Duration extended from 2.3 to 2.8, reversing shortening trend of last 4 months
- Yields on fixed-rate purchases increased modestly from 2.88 to 2.90
- Sequentials dominated activity, accounting for 75% of CMO trades
- VADMs failed to sustain interest seen in January and February
- Again, customers mindful of risks from falling rates
- PAC-1 activity decreased but remains meaningful
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP