CMO Market Update

March 1, 2021

Agency CMO spreads to Treasury yields were 2 basis points wider to close out last week and the month.  Spreads have been in a fairly narrow range, but there has been great activity in this space involving both fixed- and floating-rate products.  This is detailed in the text and charts below for the monthly trade summary.

Monthly Trade Summary

Treasury yields increased meaningfully in February, specifically on the long-end of the curve with the 10-year finishing just above 1.40% last week. With spreads holding up well for Agency CMOs, projected yields on customer purchases increased again month-over-month, with the average breaching 1.00% in February. Customers extending out on the curve and slower prepayment projections (although still generally elevated) contributed to a 3.5yr average WAL for fixed-rate investments, a slight increase over January.

However, rising rates was the story of the month and floating-rate product was in high demand. 20% of trades involved floating-rate bonds, a number more in line with November and October of last year. Supply is scarce otherwise this number would have been higher.

In terms of class type, PACs have now accounted for greater than 50% of trades in 3 out of the last 4 months.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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