CMO Market Update

July 9, 2018

The holiday-shortened week took a toll on activity as month- and quarter-end aligned with a mid-week holiday. What we did see late last week was portfolio managers beginning to line up and evaluate trades as month- and quarter-end pressures eased up and they probably had some free time to devote to it.

The typical bond traded last week looked like a sequential off of new 4.0% – 4.5% collateral. Yields in the neighborhood of 3.20%, 7-year pay windows, and WALs of 5.7yrs with little extension if rates rise.

A number of investors revisited VADMs, with decent sized offerings available at 5bp wider spreads than similar structures from a month ago. Most of the VADMs had average lives in the 4.75yr to 6.5yr range. Many investors continue to emphasize stability, willing to sacrifice a few basis points of yield for the steadiness of VADM structures or prepayment-protected multifamily issues versus the higher spreads of straight MBS or sequential CMO structures.

Looking back on the month of June, investors favored fixed-rate CMOs. 64% of CMOs Vining Sparks traded to customers were fixed-rate.

The average fixed-rate CMO Vining Sparks traded in June yielded 2.94% and had a WAL of 5.2yrs. The average floating-rate CMO Vining Sparks traded in June yielded 2.35% and had a WAL of 4.8yrs.

Kevin A. Smith, CFA

Manager, Strategic Analytics

Vining-Sparks IBG LP

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