CMO Market Update
November 22, 2021
Normal activity returned last week in the CMO space after a couple quiet weeks to start November. In terms of par amount traded, the most popular structure sought by investors was a 1.25% – 1.50% cut coupon off G2SF 3.0% traditional collateral. Other notable trades included a 3.00% cap, 0.40% floor SOFR-floater, and a couple 100% investor and 100% New York collateral trades sprinkled in the fixed-rate space.
CMO spreads to Treasury yields have tightened marginally this month, approximately 2 basis points. Year-to-date, spreads are 7-13 basis points tighter for the structures we monitor. However, with Treasury yields increasing meaningfully this year, projected yields on 1.00% – 2.00% cut PACs and Sequentials are near or at the high end of their range for 2021. Remember that as recently as the beginning of this year, investors were hardpressed to find a 1.00% yield in the 3-5 year part of the curve without taking on significant premium or extension risk. While we have not returned to pre-pandemic conditions in terms of projected yields, current levels are about as attractive as we have seen since March 2020.
For further analytical context on Agency CMOs, the Treasury and CMO sections from last week’s Investment Alternatives Matrix are shown below. Additionally, our November MBS Prepay Commentary is available with information on mortgage prepayment speeds broken down by coupon and collateral collateral type.
Travis Nauert, CFA
Analyst, Investment Strategies