CMO Market Update

May 10, 2021

CMO spreads to Treasury yields were unchanged last week and remain steady in 2021, widening 1-4 basis points year-to-date depending on maturity and structure. This, coupled with higher Treasury yields, has translated to more attractive yields for CMOs, and for three months in a row we have seen average projected yields of greater than 1.00% on customer purchases in this space.

In terms of activity, investors are heavily favoring cut-coupon GNMA PACs. Specifically, the CMO desk is seeing the most activity in discount priced, 1.00% coupon bonds off G2SF 3.00% collateral. As discussed in the monthly trade summary below, investors extended out to around a 5-year base case WAL on new purchases in March. There was some mean reversion in April as that measure dropped below 4 years, and May is seeing more of the same with the structures that customers are seeking.

For more context on this sector, please see the CMO section from last week’s Investment Alternatives Matrix. As a reminder, monthly pricing and analytics have been updated on our Client Access portal for April month-end. If you do not have login credentials, please click here to register.

Monthly Trade Summary

Analytics on April CMO trades exhibited some mean reversion in terms of WAL and Effective Duration after investors extended out notably in March. Customer purchases of fixed-rate CMOs in March projected to have a base case WAL of about 5 years. In April, new investments averaged a 3.8-year WAL, which is more in line with historical averages for our depository institution customers. Similarly, effective duration fell to 3.4. But yields were steady month-over-month, with projected yields on April purchases averaging 1.20%.

In terms of product trends, investors continue to seek out discount priced, low-coupon cuts, and it was the the 1.00% – 1.25% part of the stack that was in high demand during April. There was an increased appetite for traditional and jumbo Ginnie Mae collateral, and for G2SF 3 collateral in particular. Most trades with FNR or FHR issued bonds were 1.0% coupons off FNCI 1.5% collateral.

Activity in floating-rate CMOs has fallen off almost completely in the last two months after a decent run to start the year. Fixed-rate bonds accounted for the overwhelming majority of Agency CMO trades last month. When looking at trades by class type, PACs accounted for more than 50% of trades for the third month in a row. And a meaningful amount of TAC structures traded, accounting for most of the increase in the “Other” category by Class Type.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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