CMO Market Update

June 15, 2020

Activity continues to center on lower coupons in the fixed-rate space as investors seek protection from prepayments. There has been decent activity in HECM floaters as well. Trades last week were defined by one-way flow with customers investing outright from cash. As mentioned in recent weeks, the Trade Desk is actively seeking bid lists for customers looking to clean up smaller positions or potentially take some profits as dollar prices remain elevated.

CMO spreads to Treasury yields tightened 4 basis points last week. Tightening has been the trend since March when spreads reached their high watermark. However, spreads in this space are still wider for the year by 10-20 basis points depending on maturity and structure.

May Trade Summary

The average projected yield on customer purchases of fixed-rate CMOs has bounced around in recent months, but seems to have settled around 1.00%. When comparing to January data (see table below), one can see how much has changed since the start of the year. Customers investing in bonds with a 2-3 year average life came into 2020 purchasing projected yields around 2% on average. That has been cut in half.

One noticeable trend in recent months has been the increased activity in floating-rate CMOs. Some larger block trades accounted for this, perhaps driven by specific balance sheet needs or individual rate outlooks. Although this is not representative of widespread participation by investors, it is clearly having an effect on the metrics and something worth monitoring going forward. While spread levels for this coupon type are lower than that of similar-maturity fixed-rate bonds, there is the added benefit of a higher yield and less downside from a price perspective in a rising rate environment. When considering floating-rate bonds, remember that if the yield for a given bond does not look attractive enough, investors should be able to achieve a higher spread if they are willing to accept a bond with a lower rate cap.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
Copyright © 2021
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120