CMO Market Update

November 16, 2020



Spreads tightened 2 basis points last week for fixed-rate CMOs 3-years and longer. Spreads for floating-rate bonds were unchanged.

Spreads have tightened 10 basis points since mid-August, with most of that movement coming in 4 out of the last 5 weeks. Below are the Treasury and CMO sections from last week’s Investment Alternatives Matrix to provide context for where the market is after the recent increase in yields.



Low coupon cuts off traditional and jumbo collateral drove activity last week as investors continue to express an aversion to premiums. Tomorrow we will release an updated Matrix with approximate pricing. As shown above, 3-5 year PACs and Sequentials have been trading in a range where investors should be able to find a reasonable yield without taking on a high level of premium risk.

Activity in floating-rate bonds continues to be meaningful as discussed below in the monthly trade summary for October.


Monthly Trade Summary

A couple factors are driving changes in analytics for CMO trades in October. First and foremost, Yield Book implemented a model update last week and, broadly speaking, forecasted prepayment speeds are slower than previously projected, but remain elevated in general. This modeling change coupled with investors extending out on the curve has led to a longer WAL and a higher average yield.

As previously mentioned, customers were active again in October with respect to floating-rate bonds. This month, they accounted for close to a third of trades at 28%. The average yield on these floating-rate purchases was 0.38%, with most coupons indexed to SOFR and 1-month LIBOR.

Looking at trades by class type, Sequentials lead the way again with 67% of trades. PACs accounted for 26% of trades, the highest mark since July.

Please see the table below for additional detail.




Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

INTENDED FOR INSTITUTIONAL INVESTORS ONLY.
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
Member FINRA/SIPC
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120