CMO Market Update

January 21, 2020

As mentioned in recent Sector Updates, Agency CMO spreads to Treasurys widened meaningfully in 2019. Among products we trade and monitor, the CMO and MBS sectors were, generally speaking, the only ones to improve last year in relative value on a nominal spread basis. And while CMO spreads have tightened marginally over the first few weeks of 2020, the space still looks attractive.

Consider the graphs below, plotting weekly spreads for 3-year Sequentials with 1 and 3-year averages, as well as +/- 1 standard deviation for reference. In terms of 1-year history, you can see that spreads are now below +1 standard deviation but remain above average. When considering 3-years of history, spreads are still above +1 standard deviation.

As discussed in CMO Monthly Trade Summaries, we find that our customers, on average, invest in 3-year CMOs as they fit an acceptable risk profile. To get a sense of the marketplace, consider our weekly Investment Alternatives Matrix, typically updated second business day of the week.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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