CMO Market Update
January 4, 2021
Spreads to Treasury yields for Agency CMOs were unchanged last week to wrap up 2020. Depending on structure and maturity, spreads tightened as much as 10bps in Q4, which was a realtively modest movement compared to the first three quarters of the year. Spreads went on a wild ride as they exploded to end Q1 in the wake of the coronavirus pandemic and subsequent quantitative easing from the Federal Reserve, only to finish tighter for the year. For additional context on spreads in 2020, please see the Treasury and CMO sections below from the quarterly review snapshot provided in the overall commentary.
Later this week, pricing and analytics as of 12/31/2020 will be updated on our Client Access portal.
Monthly Trade Summary
Analytics on December CMO trades support what has been a noticable trend to close out the year: investors are willing to try something different. In relation to CMOs, customers are extending out on the curve. Typically, the average WAL purchased by customers is 2.5 years. In 2 of the last 3 months, the average WAL purchased as been closer to 3 years. Consequently, the average yield and effective duration purchased has increased to 0.79% and 3.6, respectively.
Low cut-coupons (1.0% – 1.5%, traditional and jumbo collateral) were the primary driver of activity in December. Investors continue to show an aversion to premiums and bonds with coupons in the 1.0% – 1.5% part of the stack have been trading in a range of par to 102 handles (see CMO section of Investment Alternatives Matrix). Activity in floating-rate bonds declined again in December, accounting for just 7% of CMO trades. This follows a string of strong tallies in the summer and fall months when floating-rate bonds were > 20% of CMO trades.
Breaking down trades by class-type, PACs outpaced Sequentials for the second consecutive month. PACs have accounted for more than 60% of trades in November and December.
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP