CMO Market Update
June 14, 2021
As mentioned in the monthly trade summary, Treasury yields moved sideways for most of the second quarter, but that trend gave way last week with the 10-year yield breaking below 1.50% and closing Friday at 1.45%. CMO spreads to Treasury yields tightened 2 bps week-over-week as a result. However, spreads are modestly wider on a year-to-date basis, 1-4 bps depending on maturity and structure.
In terms of activity, the trade desk saw more of the same in the CMO space last week. Low coupons, primarily 1.0% cuts, off 3.0% G2SF collateral are still accounting for the majority of trades in this sector. Investors remain focused on limiting prepayment exposure. While there may not be as much buying of prepay friction collateral (100% NY, low-loan balance) as there was last summer, low coupon cuts can still help portfolio managers work towards limiting risks in this low-rate environment.
For more context on yields, spreads, and analytics, please see the condensed Yield and Spread Snapshot (Treasurys and CMOs) and monthly trade summary below. Additionally, readers can click here to view last week’s Investment Alternatives Matrix.
May Trade Summary
In the Agency CMO space, the trade desk continues to observe similar themes that have been playing out in recent months. Activity is still defined by primarily one way flows with customers investing outright as cash levels and liquidity are high. Cut-coupon (1.00% – 1.25%) PACs off GNMA collateral remain popular among investors.
Over the last couple of months, Treasury yields have been moving sideways and CMO spreads have been steady. This translates to projected yields on fixed-rate CMO purchases that are in line with recent months. There was a slight decline in yields month-over-month, from 1.20% in April to 1.14% in May. As shown in the table below, customers have been able to find near 1.00% yields or greater on average this year. Durations and Weighted Average Lives for May purchases were in line with historical averages.
Fixed-rate bonds continue to make up the overwhelming majority of purchases, but there was a noticable uptick in floating-rate purchases as well. After very little activity to speak of in March and April, floating-rate purchases accounted for just over 15% of May activity.
Breaking trades down by structure, PACs continue to lead the way, making up nearly 70% of fixed-rate purchases. Investors have been drawn to low coupon cuts to lower the dollar price and avoid premium risk. Depending on the deal, 1.00% – 1.25% coupon bonds have been trading at prices ranging from slight discounts to par handles in recent months.
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP