CMO Market Update

June 10, 2019

CMO spreads to Treasury yields widened once again last week. 2-3 year PACs and Sequentials were 3-5 basis points wider, while 5- and 10-year bonds widened 2-3 basis points.

Earlier this year, spreads for intermediate-term paper broke through highs from recent years, but now spreads for shorter bonds have as well. By our measurements, spreads on 3-year Agency CMOs have not been this wide since late 2016.

In the past, we have mentioned that customers may want to consider “cut-down” coupons when investing in CMOs. This was reiterated in last week’s June MBS Prepayment Commentary:

For those who missed it last week, below is a snapshot of what we saw our CMO buyers investing in last month.

May Trade Summary

Yield Book analytics on fixed rate CMO investments were steady once again. Thanks to widening spreads, yields have held up well despite the 40 basis point drop in Treasury yields this month. Granted, a substantial part of the move occurred last week at the end of the month.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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