CMO Market Update

June 7, 2021

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

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