CMO Market Update

May 18, 2020

One persistent theme in the CMO space has been the level of dollar prices. Lately, investors in this sector have seen bonds with attractive yield and average life profiles, only to be faced with a sizeable premium. For many, that is a deterrent. But let’s remember, the price is what it is for a reason. Bonds that project to perform well and have desirable structures should be in high demand.

In the wake of the coronavirus pandemic and subsequent Fed easing, more specifically the Central Bank’s purchases of Mortgage Backed Securities, investors re-allocated into a variety of other products. With rates at historic lows, investors are seeking further protection from calls and prepayments. CMOs have participated as investors seek to build consistent cashflow from their portfolio, and certain collateral types work toward achieving that goal.

For example, the Trade Desk continues to see interest in bonds backed by loans with low original max loan sizes. All else equal, it should not be economically favorable for these borrows to refinance, providing the stable cashflow that investors seek. While supply is not super abundant, we have seen some “85k max” bonds, that is bonds collateralized by loans with a max original balance of $85,000. Other investors have looked to VADMs which usually limit extension risk.

For those uncomfortable with the premium, don’t forget the other side of the trade. The Desk, as always, is seeking bid wanted lists. Holders of CMOs can look to harvest gains and go into other products like CMBS or Munis where attractive spreads are also present.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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 © 2021
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120