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.

For those working with the portfolio who are not signed up for our Client Access portal, please click here to register.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks

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 © 2022
This is a publication of Vining-Sparks IBG, LLC
775 Ridge Lake Blvd., Memphis, TN 38120