CMO Market Update
February 3, 2020
CMO spreads to Treasury yields widened 2 basis points last week for 5 and 10 year bonds, undoing some of the tightening we’ve seen in the first couple weeks of this year. Now, we will review January activity with the monthly trade summary.
January Trade Summary
Customer preferences usually create some stability when it comes to analytics on CMO trades, and that was the case again in January. Typical metrics, such as yield, WAL, duration, and convexity, were right in line with previous months’ results. The low-rate environment has led to lower projected yields purchased since last year, but as discussed in recent CMO updates, nominal spreads are wide when looking back at 12 and 36 month history, making this space attractive for investors. Where we do see variability month-over-month is in class type. PAC-1s saw the majority of activity, accounting for 60% of fixed rate trades.
Below are some notable points from this month’s results:
- Effective Duration declined from 2.5 to 2.2
- Effective Convexity less negative, from -1.0 to -0.7
- WAL dips below 3.0 at 2.9
- As mentioned above, PAC-1s saw the most activity by class type
- Sequentials still prominent with 37% of fixed trades
- VADMs very quiet with only a couple trades
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP