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