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

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