CMO Market Update

November 2, 2020

Spreads to Treasury yields for fixed-rate and floating-rate agency CMOs were unchanged last week.

Customers continue to invest outright from cash as liquidity is abundant, and familiar themes persist in terms of collateral in demand. Last week was especially active for low coupon cuts, ranging from 1.0% – 1.5%, off prepay friction collateral, such as low-loan balance (250k max., for example) and 100% NY, as well as jumbo collateral. Once again, there were a number of trades involving floating-rate bonds. As shown in the Monthly Trade Summary for October (below), floating-rate bonds have accounted for a meaningful percentage of CMO trades in recent months.

Monthly pricing and analytics have been updated for October month-end on our Client Access portal (login required). For those with access, this will give you a chance to review updated gain/loss estimates as year-end preparations are underway. If you do not have access, but would like to register, please click here.

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 lead 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

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.
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