CMO Market Update
January 10, 2022
Trading activity was very strong last week to start 2022 as investors once again saw Treasury yields rise precipitously. The 5-, 7-, and 10-year yields rose most sharply, with each increasing 24-25 basis points. With more attractive yields available, buyers came into the market.
Within the CMO sector, the most traded structure was a fixed-rate 1.50% PAC off FNCL 3 collateral. 1.50% was the lowest fixed-rate coupon that traded last week, speaking to what has been discussed in recent updates: as rates rise, investors are moving up the coupon stack. To that end, another popular structure was a 2.00% sequential off G2SF 3 collateral. No floating-rate structures traded.
The Treasury and CMO sections from last week’s Investment Alternatives Matrix are shown below. Barring a steep rally, yields will be notably higher in this week’s edition, both for Treasurys and CMOs. To reflect market activity, we have included primarily 1.50% – 2.00% coupons for the fixed-rate CMO examples.
As a reminder, year-end pricing and analytics (as of 12/31/2021) for customer portfolios is now available on our Client Access portal. For those that do not have access but would like to register, please click here.
If you missed it last week or would like to view the data again, the December CMO trade summary is below.
Monthly Trade Summary
Treasury yields rose in December with bonds maturing in one year and longer increasing at least 10+ basis points in yield. The 2-year yield saw the largest increase of 18 basis points. It is no surprise then that projected yields on customer purchases have been increasing. Once again, the average yield purchased increased month-over-month. Also contributing to higher projected returns, customers extended out beyond 4-years last month, a half year longer than in November.
As is usually the case, fixed-rate bonds accounted for most of the activity during the month. However, as mentioned above, there was decent floating-rate activity to finish out the year, and that coupon type accounted for almost 20% of trades. That percentage is down by nearly half from November, which was an outlier month compared to the rest of the year.
60% of December trades involved sequential structures, flipping the script on the rest of 2021 as PACs had dominated for most of the year.
Travis Nauert, CFA
Analyst, Investment Strategies