CMO Market Update

December 7, 2020

Agency CMO spreads to Treasury yields were unchanged again last week, remaining at the low end of their range for 2020.

The calendar has turned to December and Investors are focused on executing year-end strategies. With that in mind, we look to the November trade summary to remind us what recent months have looked like and where the market could be headed.

Monthly Trade Summary

Rates have risen from where they were in the summer and the 10-year Treasury yields 94bps as of this writing. The average yield purchased on a fixed-rate CMO has reflected this pop in rates over the last couple of months. While the average yield purchased in November decreased from October, investors were also buying shorter bonds with a projected base case WAL of 2.4 years, compared to 3.4 years in October.

While some portfolio managers have been willing to extend out on the curve, on average, investors are sticking to bonds with a base case WAL of 2-3 years. This is a sweetspot for many depository customers looking for predictable cashflow and yield pickup.

Activity in floating-rate bonds was meaningful again, but fixed-rate coupons were the predominant trade. As mentioned in recent CMO updates, low coupon cuts (1.00% – 1.50%) are in high demand as premium averse investors seek lower dollar prices.

One of the biggest changes month-over-month is that PACs outpaced Sequentials in terms of Par Amount traded by class type. The last time this happened was in April.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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