CMO Market Update

March 2, 2020

CMO spreads widened 5 to 10 basis points last week as Treasury yields continued their descent. Spreads for 2-year CMOs are still tighter year-to-date, by about 3 basis points. But spreads for 3, 5, and 10-year bonds are now wider for the year.

Now, we shift our attention to the February Trade Summary and examine Yield Book analytics on bonds purchased last month.

February Trade Summary

Customers stuck to their game plan investing in CMOs with a WAL of around 3 years and an Effective Duration of 2. There was a slight shift towards bonds with less negative convexity, which makes sense in this environment. All else equal, more negative convexity translates to a less favorable price/yield relationship, i.e. less upside in terms of price appreciation when rates fall.

The biggest change month-over-month is the average projected yield that investors purchased. On average, customers purchased yields below 2.0%. And yet, spreads are wider than they have been in recent years. So, while absolute yield numbers may not seem attractive, the relative pickup still grabs the attention of investors.

Lastly, moving on to bond characteristics, investors focused solely on fixed rate bonds. And in terms of class type, Sequentials saw the most activity, accounting for 67% of trades.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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