CMO Market Update

August 10, 2020

Spread Movement

CMO spreads to Treasury yields tighened 5 basis points last week. For the maturities and structures we track, CMO spreads are within 7-10 basis points of their low watermark for the year. These levels were last seen at the beginning of 2020. As new issuance has dwindled and investors have bidded prices higher, the market has unwound all of the widening seen in the CMO space during height of the coronavirus pandemic. With that said, investors are still finding value in this sector, most notably by seeking lower cut coupons and collateral with call protection in an effort to create steady cashflow and avoid heavy prepayments.

Monthly Trade Summary

July was another active month for the CMO sector. The average purchased yield dropped month-over-month as demand for lower cut coupons, 1.25% – 2.00%, drove activity. Additionally, models continue to project elevated prepayments in this low rate environment. As shown in the table below, activity in floating-rate product was meaningful throughout the the second quarter and that continued in July as some investors are looking for upside in the event yields pop up from current levels. Sequentials edged PACs in terms of breakdown by class type, albeit by a slimmer margin than in June.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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