CMO Market Update
May 4, 2020
Most sectors saw varying degrees of spread tightening last week, but the CMO space was an exception. Spreads to Treasurys for CMOs, as well as for MBS, were unchanged week-over-week. It was a welcomed reprieve as spreads tightened every week in April. However, spreads in this sector remain attractive from both a historical and relative perspective. As shown in the Treasury Yield and Spread Snapshot, also found in the Overall Commentary, CMO spreads are still wider Year-to-Date and Year-Over-Year.
In terms of relative value, as the Fed continues to buy 15- and 30-year TBA deliverable MBS, CMOs are a reasonable alternative for investors seeking amortizing product. As a reminder, the Fed is not purchasing CMOs, but more intervention is scheduled for the CMBS space this week. The Fed will purchase up to $500mm of DUS paper with greater than a 7yr Average Life, and up to $250mm worth of Ginnie Mae Project Loans with greater than a 3-year Average Life.
One last point of interest: we continue to see good activity with floating-rate CMOs. At a time when it can be difficult to avoid high premiums for fixed-rate bonds, investors have looked to floating-rate product with around a 5.5%-7.0% cap. In terms of a risk/reward proposition, investors looking for more yield will have to accept a lower cap.
Travis Nauert, CFA
Analyst, Investment Strategies
Vining Sparks IBG, LP