CMO Market Update

February 1, 2021

CMO spreads to Treasury yields were unchanged last week. Although it was a very active month for investors, it was a relatively light week in this space to close out January. The trade desk continues to see demand for stripped-down coupons ranging from 0.5% – 1.5%, both PACs and Sequentials, as well as SOFR-based floaters when supply is available.

Monthly Trade Summary

Projected yields on customer purchases increased again last month. Multiple factors contributed to this including yield and spread movements, prepayment projections, and investor trends. As Treasury yields have increased on the long end of the curve, CMO spreads have held up well by tightening only a few basis points. Additionally, projected prepayment speeds have generally declined with the rise in benchmark yields. The decline in prepayment speeds, coupled with investors willing to extend out on the curve, has helped drive yields and WALs higher.

Fixed-rate bonds continue to dominate trades by coupon type, accounting for more than 90% of trades. Floating-rate bonds were in line with December, but still lower month-over month.

2020 concluded with two consecutive months in which PACs outpaced Sequentials in trades by class type. To start 2021, Sequentials shot back up to over 70% of trades. Activity in VADMs has been virtually non-existent.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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