CMO Market Update
January 13, 2020
CMO spreads to Treasurys tightened 1-3 basis points last week. We saw consistent widening in the first half of 2019, with spreads reaching highs for the year in the 3rd or 4th quarter depending on class type and maturity. Levels were steadier to end the year and, overall, bonds are still trading in the same range.
Whereas investors entered 2019 expecting a 3% yield in the CMO space, the environment has undoubtedly changed. Last year’s drop in rates that allowed spreads to widen has also translated to lower yields. As shown in the Monthly Trade Summary (below), bonds purchased by our customers are now projected to earn closer to 2.25%, given the duration profile in which they typically invest.
If you are not familiar with it already, please consider our Investment Alternatives Matrix, a weekly comparison of bond analytics across product types and sectors, including CMOs.
For those that missed it last week, the December Trade Summary is below.
December Trade Summary
Fixed rate CMOs purchased in December are projected to yield 2.17% on average, an 11 basis point increase from November. Treasury yields rose from November to December, accounting for some of the month-over-month change. Additionally, customers extended duration. Fixed-rate buying dominated as usual, but there was some floating-rate investment as well. Please consider the notes and table below:
- Overall, Yield Book analytics consistent with recent months
- Effective Duration increased from 1.8 to 2.5
- WAL steady at 3.1 years
- Good distribution among class types:
- PAC-1s saw the most activity with more than 50% of trades
- VADMs accounted for 19% of trades after a silent November
- Just over a quarter of trades involved Sequentials
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP