CMO Market Update

April 27, 2020

The Treasury Curve was steady week-over-week. Short to intermediate term yields rose marginally while yields for bonds maturiting in 10 years and longer declined slightly. Even then, CMO spreads tightened another 8 basis points and have tightened more than 20 basis points month-over-month. Despite this trend, CMO spreads are still 20+ basis points wider than where they started the year.

While spread tightening might not sound like a positive development, there are a couple points of interest here. First, as previously mentioned, spreads for the sector are still wider on the year. Second, for those currently holding CMOs, prices are generally higher. Investors needing liquidity or looking to take gains should find the market more favorable than a month ago.

Speaking of liquidity, the Fed continues to purchase TBA deliverable 15 and 30-year MBS, as well as CMBS product, including Project Loans, Freddie Ks, FNMA Aces, and DUS bonds. As market participants continue to adjust to these flows, CMOs remain an attractive investment alternative. The Fed is not buying CMOs, although eventually their purchases of 30-year collateral will impact new issuance.

To conclude this week and provide readers with a general sense of where the sector is trading, please view the snapshot below from last week’s Investment Alternatives Matrix.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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