CMO Market Update

February 8, 2021

Investors were very active in the CMO space last week as customers continue to focus on product types and themes discussed in recent months. In the fixed-rate space, cut-coupon (0.5% – 1.5%) PACs and Sequentials with a 3-5 year base case WAL are garnering the most attention. In terms of dollar price, bonds with these characteristics are generally trading in a $99 – $102 range, which premium-averse investors should find reasonable.

As for floating-rate product, deals are generally coming to market with a discount margin of 15-20 basis points, 0.25% floors, and 3.50% caps. As market participants continue to prepare for the transition away from LIBOR, bonds indexed to SOFR have been trading in short order.

Spreads to Treasury yields for fixed-rate CMOs were unchanged week-over-week. Despite sitting at some of the tightest levels observed in recent years, spreads have tightened only a couple basis points compared to the rise in Treasury yields to start the year. As a result, yields remain relatively attractive compared to other amortizing product.

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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