CMO Market Update

March 7, 2022

Activity was lighter than usual last week in the Agency CMO space. Of the trades that were executed, 2.25% – 2.50% coupon cuts were in the highest demand, with FNCL and G2SF 3.5 the predominant collateral types.

As the calendar has turned to March, the end of Q1 is in sight and there has been no shortage of meaningful market movements. Some developing trends that investors are sure to keep their eyes on: rising yields, higher coupons, and tightening spreads.

As experienced by the bond market overall, yields have risen precipitously to begin the year. This has been most notable at the front end of the curve with market participants adjusting expectations for future rate hikes from the Fed. The sell off has made prices more attractive for 2.50% – 3.00% cuts, and thus investors are moving up the coupon stack. A reminder that for most of the pandemic, the focus area in Agency CMOs was 1.00% – 2.00% cuts. And although absolute yields are as attractive as they have been in 2 years, rising benchmark yields have led to tightening nominal spreads.

Below is the monthly trade summary for February.

Monthly Trade Summary

As anticipated, the average projected yield on February CMO purchases breached the 2.0% threshold. Naturally, just as we have reached this psychological barrier, markets have taken a risk-off tone. There’s no way of knowing if we have reached a local top in terms of yields, so those that have remained active have done well to add to the portfolio at these levels.

Other risk/return metrics were in line month-over-month. In terms of structure, it was nearly an even split between Sequentials and PACs traded. This has oscillated back and forth for the last few months. As is usually the case, fixed-rate coupons dominated activity, although there was a slight uptick in floating-rate activity month-over month.

The average projected WAL shortened nearly half a year from January to February. It will be interesting to see what this measure looks like for March purchases given the risk-off sentiment that has taken hold.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks

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 © 2022
This is a publication of Vining-Sparks IBG, LLC
775 Ridge Lake Blvd., Memphis, TN 38120