CMO Market Update
August 31, 2020
Last Week’s Activity
Customers were active again last week investing in 2.0% coupons off Jumbo collateral. Additionally, the trade desk continues to move low coupon cuts, ranging from 1.0% – 1.5%, and bonds backed by Investment Property collateral as investors seek prepay protection. While Investment Property and other favorable collateral types, such as 100% New York, are trading at high dollar prices, rememeber this can be thought of as an insurance premium with historical data showing these bonds have experienced slower prepayments compared to traditional collateral. Please see the graph below from our August MBS Prepayment Commentary for more detail.
Other themes playing out include meaningful activity with floating-rate CMOs. As noted in recent Monthly Trade Summaries, we have seen an uptick in the percentage of trades accounted for by floating-rate bonds. With the month coming to a close today, we’ll see how well this trend holds up in August.
And slowly but surely, more two-way flow is occuring with customers either cleaning up odd lots or harvesting gains to the extent they exist. Granted, this is coming after months of almost exclusively one-way flow with investors purchasing bonds outright from cash, so “more” is clearing a relatively low hurdle, but something to watch going forward.
If you are signed up for our Client Access portal, you will find updated gain/loss estimates as monthly pricing has been updated for August.
CMO spreads to Treasury yields were unchanged. Prior to this month, spreads were steadily grinding tighter week after week in a trend that played out from April to July. As August comes to a close, they now stand marginally above or at lows for the year.
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP