CMO Market Update

January 27, 2020

Spreads to Treasury yields tightened another 2 basis points for 3, 5, and 10-year Agency CMOs. This marks the third consecutive week of spread tightening in the CMO space. However, as mentioned in last week’s update, the sector still looks attractive.

Specifically, nominal spreads for 3-year PACs and Sequentials are wide when compared to recent history and appear to offer relative value. Spreads are above 12-month averages and, when looking back over three years, wider than +1 standard deviation. This should interest customers because, as shown in the December Trade Summary, they tend to favor 3-year CMOs on average. The low-rate environment continues to drive trades as investors, left with cash on hand due to elevated prepayments and called bonds, seek acceptable rates of return and falling rate protection. Please consider the graphs below.

Next week, we will review January activity with the Monthly Trade Summary.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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