CMO Market Update
April 6, 2020
Agency CMO spreads to Treasury yields tightened last week to close out March. Overall, spreads were wider for the month and remain wider for the year, but shed some of that relative value in recent weeks. Investors have been seeking lower-coupon bonds, 1.5% – 2.0%, off of 30-year, mid-level coupon collateral. After widening out in recent weeks, floating-rate spreads tightened as well.
Shifting gears, here are a couple things to have on your radar for the days and weeks ahead.
- April prepayment speeds are scheduled for release tonight. The data is widely expected to show increased prepayments, primarily due to timing. The applicable re-financing window for March prepayments (reported in April) is approximately between mid-January to mid-February. However, prepayments are expected to drop off going forward as home sales and refi-activity grind slower due to the coronavirus outbreak.
- Speaking of the outbreak, and as mentioned in last week’s update, the Fed has stepped into multiple markets, including the CMBS space, with its string of purchasing programs. There has been no mention of the Fed purchasing CMOs. However, eventually their purchases of 30-year MBS collateral should impact new issuance in the CMO market.
Below is a condensed view of the Treasury Yield and Spread Snapshot from the Overall Commentary, with CMOs alongside for reference.
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP