CMO Market Update

April 20, 2020

Last week, we saw a continuation of recent themes in the CMO space. Spreads to Treasurys for fixed and floating rate bonds tightened for the 4th consecutive week in what has been a slow, steady movement. Despite this tightening trend, investors looking for amortizing product should still find value in CMOs relative to MBS where Fed intervention persists. The Central Bank is buying TBA deliverable 15- and 30-year MBS, driving investors to non-deliverable product like FNMA and GNMA Jumbos. The CMBS space will see more intervention as well this week. Specifically, the Fed is scheduled to purchase DUS paper with a 7+ year WAL and GNMA Project Loans with a 3+ year WAL.

Again, the Fed is not buying CMOs, although their purchases of 30-year collateral will impact new issuance.

In light of April factors released earlier this month, I wrote last week that Investors can take additional measures to protect the portfolio from 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, even if that scenario doesn’t appear to be a huge concern in the current environment. For those taking a contrarian view, however, floating rate CMOs might be of interest. We contintue to see good activity in bonds with a 7% cap offered at a discount to par.

Please see the graph below for a snapshot of CMO spreads and yields:

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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