CMO Market Update

February 16, 2021

CMO spreads were unchanged week-over-week and yields have generally kept up with the recent rise in Treasurys, tightening just a few basis points year-to-date.

Below is a snapshot of the Treasury and CMO sectors from last week’s Investment Alternatives Matrix. We do our best to make the examples included representative of current market activity. As such, the CMOs lean toward fixed-rate, low-coupon cuts of varying structure and maturity. The trade desk is seeing the most activity in coupons ranging from 0.5% – 1.5%s, with dollar prices ranging from $98 – $102 handles. While the projected yields have a fairly defined range of .80% to just shy of 1.00% for the 2yr – 5yr space, note the differences in +100/-100 scenarios as structure and dollar prices (premium or discount) begin to cashflow and ammortize/accrete accordingly.

The sector continues to see strong demand as investors are reinvesting cashflow and cash-on-hand: deposits, called bonds, and mortgage product prepayments are all serving as a huge source of funds with which to invest.

In case you missed it last week, the January CMO trade summary is included below.

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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