CMO Market Update

June 22, 2020



Spreads to Treasury yields for fixed-rate CMOs continue to grind tighter, shaving 2 basis points last week, but remain wider by 10-20 basis points year-to-date.

In terms of activity, short, lower-coupon front sequentials consistently generate interest from investors. More specifically, many customers are seeking 2.0% or lower cuts, with some going as low as 1.25%. While the spread pickup is not as generous as longer, higher-coupon bonds, customers aim to benefit from greater prepay protection, as well as lower dollar prices. As mentioned in previous CMO updates, dollar prices are high in general, and some investors are expressing an aversion to mid or high premiums given the low-rate environment.

Trades have been defined by primarily one-way flow with investors buying bonds outright from cash as called bonds and prepayments continue to provide customers with a source of funds. With that said, the Trade Desk is actively seeking bid lists as some customers might look to clean up smaller positions or possibly take some gains.




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. 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 lower 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

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
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
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120