CMO Market Update
December 10, 2018
With the Treasury curve so flat, I thought it would be interesting if we took a look this week at relatively short (Highlights 1-4) and one intermediate (Highlight 5) term CMOs. It’s certainly important to note that, even though the reference curve is flat, it is still possible to enhance yields by selectively choosing “add-on” risks. Admittedly, it can be hard to compare and contrast structured products but I’ve done my best to do it as fairly as possible and provide as much details for you to draw your own conclusions if you want.
- #1 and #2 look fairly comparable, but #2 is slightly longer and an investor can pick an additional 12bps and it is slightly less negatively convex.
- Highlights #2, #3, and #4 are also an interesting comparison.
- #3 has slightly more extension risk, is more negatively convex than #2, and consists of non-generic collateral but an investor can pick 8bps compared to #2
- #4 has even more extension risk and is the most negatively convex in this grouping but an investor can pick 13bps when compared to #2
- Highlight #5 may stand out to you as being the longest CMO in the grouping but not having the highest yield.
- It looks to have the most stable cashflow profile of all the Highlights and if an investor wanted to have some cushion to rates falling, it provides the most. In this case, it costs the investor 5bps when compared to #4
- One last note of interest, every single CMO has a shorter projected “Final Principal Payment” when compared to a generic 15yr 3.5 MBS.
November Trade Summary
For those who missed it last week, below is a snapshot of what we saw our CMO buyers investing in last month.
Kevin A. Smith, CFA
Director Investment Product Strategies
Vining Sparks IBG, LP