CMO Market Update
May 13, 2019
CMO spreads to Treasurys widened 3-5 basis points last week as Treasury yields dropped 4-8 basis points across the curve. For weeks, spreads for 5- and 10-year Agency CMOs have been at or near their widest levels since 2018, while shorter, 3-year CMOs have lagged that trend. Last week’s movement, however, leaves 3-year Agency Sequentials 3 basis points shy of a high watermark set in April of 2018. 3-year PACs, on the other hand, are now earning nominal spreads not seen since December of 2016.
As exhibited in the Treasury Yield and Spread Snapshot from the overall commentary, the CMO sector stands out in that it is the only space we cover to have seen a net spread widening this year. Furthermore, only short Agency Callables and fixed rate MBS have seen a similar widening trend on a Year-Over-Year basis.
If you missed it last week, please find the April Trade Summary below:
April Trade Summary
Yield Book analytics on CMO trades have been steady since February. Unfortunately, that means 3% yields can be difficult to achieve. Effective Durations and Weighted Average Lives have stuck around 2.5 and 3.5, respectively, which tends to be a sweet spot for many of our Customers. In terms of bond characteristics, customers invested in a wider variety of class types this month. March was dominated by Sequentials, while PAC-1s accounted for nearly a quarter of activity. April saw a more even distribution.
- Customers invested in fixed-rate coupons
- Duration shortened from 2.8 to 2.4
- WAL back below 4, in line with three months prior to March
- Yields on fixed-rate purchases decreased 3bps from 2.90 to 2.87
- Customers showed renewed interest in VADMs
- PAC-1s hanging around 20%
- Sequentials still accounting for greater than 50% of trades
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP