CMO Market Update

December 6, 2021

Monthly Trade Summary

Treasury yields were volatile in November and finished the month mixed. Yields on 1-3 year government bonds increased 10, 7, and 8 basis points, respectively. Bonds 5-years and longer decreased in yield, with the 10-year Treasury dropping 11 basis points.

Investors were active in the CMO space during November, except for the holiday-shortened week of Thanksgiving. Overall, Yield Book analytics on November purchases were in line with the prior two months with respect to yield, effective duration, and Weighted Average Life (WAL). The average projected yield purchased declined to 1.35%, but November investments were slightly shorter with a WAL of 3.7, as compared to 4.1 in October.

As shown in the table below, floating-rate activity increased meaningfully as based on current par traded. However, it would not be fair to say there was widespread demand for floating-rate coupons as a small number of trades accounted for the jump month-over-month. We’ve observed this a few times in 2021, previously in August.

The majority of inquiries in this sector continue to be for low coupon PACs and Sequentials. Breaking activity down by structure, PACs accounted for more than 50% of trades again last month, although Sequentials were as close to 50% as they have been in the last 5 months. June is the only month this year in which customers have purchased more Sequentials than PACs.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks