CMO Market Update

January 28, 2019

We mentioned last week that the 5-year space tends to be a “sweet spot”, duration and cashflow wise, for many of our investors and it also looks relatively good on an historical spread basis. To that end, this week we have a group of 5-year +/- PAC CMOs to compare and contrast against a current coupon 15yr MBS.

There is certainly “structure risk” when investing in a CMO when compared to a MBS. We have tried to account for this risk a couple ways. First, we use Yield Book and their well-known and regarded prepayment models to calculate our results. Second, using Option Adjusted Spread (OAS) to compare MBS and CMOs should help ferret out poorly structured CMOs. Of note, all the PACs have a wider Z-Spread and save Highlight 1 a wider OAS as well.

As always, if you have any questions, comments, or want specific reccomendatiosn tailored for you, please reach out directly to either me or your account representative.

Next week we will have the January Trade Summary to review.

Kevin A. Smith, CFA

SVP, Director Investment Product Strategies

Vining Sparks IBG, LP

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