CMO Market Update
January 18, 2022
Agency CMO yields look increasingly attractive as benchmark yields continue to rise. Despite the yield curve rising again last week, nominal CMO spreads were unchanged. As shown in the table below, CMO spreads have not changed meaningfully on a year-over-year basis. 5- and 10- year bonds have tightened 5-8 basis points compared to this time last year.
As investors continue adjusting their portfolios in response to the Fed’s hawkish pivot over the past month, many are looking to move up in coupon in both the MBS and CMO spaces. For CMOs, customers are gravitating towards 1.75% – 2.25% coupons. Higher coupons will promote asset sensitivity, while prices closer to par will reduce variability in yield.
Looking ahead to next week, we will be rolling over to January pricing and analytics. Including this morning’s movement, the 2-, 3-, and 5-year Treasurys are up 27, 35, and 34 basis points, respectively, since our last pricing date of December 31, 2021.
Last call for the December Trade Summary, which is included 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