CMO Market Update
July 22, 2019
CMO spreads to Treasurys were unchanged last week and this has been the theme of the month so far. Treasury yields are relatively unchanged since July 1. The 5-year space has seen some tightening, around 5 basis points for Sequentials and PACs, but spreads for shorter and longer maturities haven’t budged, remaining at or near highs for 2019.
As you may recall from our June Trade Summary, customers active in CMOs began the year investing in bonds with an average yield, duration, and average life profile of 2.90%, 2.5, and 3.5-4 years, respectively. Now, bonds with similar profiles project to yield under 2.50%. Current marketplace challenges include participants’ expectation for a quarter-point rate cut from the Fed next week, in addition to elevated mortgage prepayment levels.
Those with cashflow needs and money to invest may want to consider “cut-down” coupons (e.g. 3.5 coupon off of 4.0 collateral) to lower the price and risk to underperforming yields.
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP