CMO Market Update

August 24, 2020



Last Week’s Activity

The trade desk saw some interesting developments last week. In the fixed-rate space, investors were active in front sequentials off 30-year jumbo collateral. There was decent activity with floating-rate product as well. This is a trend we continue to monitor as floating-rate activity has been meaningful in recent months. Please see the Monthly Trade Summary below for more detail.

After weeks of predominantly one-way flow with investors purchasing bonds outright from cash, swap activity was more prevalent. Motivations for selling in this market include realizing gains to the extent they exist, which shouldn’t be scarce considering current pricing levels, and cleaning up odd lot positions.

If you are signed up for our Client Access portal, you will find updated gain/loss estimates later this week when monthly pricing is updated for August. If you do not have access but would like to sign up, please click here to register.


Spread Movements

CMO spreads to Treasury yields were unchanged last week. However, given the tightening in this space in recent months, I’ve included the Treasury and CMO sections from last week’s Investment Alternatives Matrix for reference.



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

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120