CMO Market Update

December 16, 2019

With everything that has taken place this year, from Fed rate cuts and falling Treasury yields to widening CMO spreads, I thought it would be worthwhile to examine what investors can expect from this sector as 2019 winds down. To that end, we reintroduce “Structure Highlights”.

Over the past 12 months, our Customers have typically invested in CMOs with a 3.5-year Average Life. Some investors are averse to premiums, while others are more sensitive to extension risk or price volatility. Please consider the table below which includes a handful of CMOs, sorted by WAL from low to high, as well as a 15-year 2.5 MBS for comparison.

Remember, there is always a tradeoff when it comes to risk and reward. For example, if capturing yield is the primary objective, then one might prefer Highlight 3 or 4. But, notice that yield comes at a premium with Highlight 4, and with extension and price risk with Highlight 3. If price volatility is a concern, then Highlight 2 might be your bond. It comes at a modest premium, but also gives up 12 basis points in yield to the next closest bond, Highlight 5.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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