CMO Market Update

August 5, 2019

Last week, CMO spreads to Treasurys widened 5bps for 2-year paper. Spreads for intermediate and longer-term PACs and Sequentials were unchanged. This week, we review July activity with the Monthly Trade Summary.

July Trade Summary

Investors were very engaged in the CMO sector during July. Yields purchased continue to fall for fixed rate bonds, which is not surprising given the way Treasurys have declined. But on a spread basis, CMOs are still within 5-10bps of 2019 highs reached in June.

As is usually the case, fixed rate buying dominated, although there was a slight uptick in floating rate activity after a quiet June. With rates low in general, and the potential for further declines (as of this writing, the belly of the curve is down approximately 10bps from Friday, August 2nd), it’s not surprising to see VADMs accounting for such few trades. However, if sentiment were to shift and rate expectations reverse, investors may look to that product type for more predictable cashflows if extension risk becomes a concern.

With all that said, analytics and trade characteristics have not changed drastically. Sequentials are accounting for 2/3 of trades, and durations, convexity, and average lives, although with some movement month-over-month, are in line with prior months.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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