CMO Market Update
July 29, 2019
CMO spreads to Treasurys tightened last week. 3-year Agency Sequentials and PACs were 3 and 4bps tighter, respectively. 5- and 10-year bonds were 5bps tighter. Spreads in the 10-year space were unchanged since June, when multiyear highs were reached. Steady widening throughout the first half of 2019 helped spreads on 10-year bonds reach levels not seen since February of 2014. Last week’s movement brought us off those highs.
Despite last week’s tightening, CMOs appear to offer good relative value compared to other sectors. This is evidenced by the 20+ bps increase in nominal spreads YTD. This data can be found in the Treasury Yield and Spread Snapshot from the Overall Commentary.
News headlines are gravitating towards the Fed’s rate decision this week. With markets pricing in a 25bps cut, and a slight chance of a 50bps cut, it stands to reason that elevated mortgage prepayment levels from recent months will sustain. As mentioned in previous CMO updates, 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.
Next week, we will review activity in July with our Monthly Trade Summary.
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP