CMO Market Update

December 9, 2019

Spread Talk

CMO spreads to Treasurys tightened one basis point last week. Generally speaking, spreads have been very steady in the second half of 2019. We haven’t seen a week-over-week change greater than 5 basis points since July, and spreads remain within 5-7 basis points of where they ended the second quarter. With that said, just a reminder that of all sectors we monitor, CMOs have benefited the most this year in terms of nominal spread widening and remain an attractive investment in terms of relative value. Please see the Treasury Yield and Spread Snapshot from the Overall Commentary for more detail.

For those interested, our December MBS Prepay Commentary was released last week and discusses the broad decline in prepayment speeds observed.

In case you missed it, the November Trade Summary is below:

November Trade Summary

Analytics on CMO trades exhibited some mean reversion this month. November’s results look similar to what we saw in the first half of 2019. Investors looked to fixed rate coupon bonds as the overall environment suggests rates could stay put or fall even further. The average yield purchased declined, hanging on to 2%. This makes sense as customers invested in shorter-duration bonds.

VADM activity was notable over the two previous months, but disappeared in November. We will monitor this trend going forward and see if rate movements dictate activity in this product type.

Below are some of the notable points from this month’s results:

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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