CMO Market Update

August 30, 2021

Agency CMO spreads to Treasury yields tightened 2 basis points last week. Lately, there hasn’t been much discussion of spreads in this sector, mainly because there hasn’t been any significant movement. Even after last week’s tightening, the maturities and structures we monitor are little changed from where they started the year. 5-year PACs and Sequentials are 6-7 basis points tighter from the beginning of 2021, the biggest change in either direction that we’ve seen in this sector.

Activity was not as widespread as recent weeks, but still strong as a number of large block sizes traded. Investor focus remains on low-coupon bonds off jumbo collateral. Although 1.00% coupons saw good demand, 1.50% coupons were the most popular last week, primarily off G2JM 2.5 and FNJMC 2.5 collateral. Although the trade desk saw good demand for floating-rate bonds and low-loan balance collateral in the weeks prior, last week was fairly quiet for those product types.

As a reminder, Yield Book’s prepay model V21.7 is now live and in use as the production model.  As it relates to CMOs, changes are more apparent (faster projected speeds) for early pay tranches collateralized with higher coupon 30-year MBS. Changes are less drastic for cut-coupon CMOs, which our customers have been most active in for some time now.

Updated pricing and analytics as of August 23rd are now available through our client access portal. For those that have access, this serves as a good opportunity to review updated gain/loss estimates as we head towards the end of Q3 and start thinking about end of year planning. If you do not have login credentials, but would like to request access, please click here.

Next week, we will review this month’s activity with the August trade summary.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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