CMO Market Update
November 8, 2021
From the Fed’s taper announcement to the jobs report on Friday, there was no shortage of economic news and data last week. The week ended with yields for Treasurys 2-years and longer falling. The 2-10 year part of the curve saw the biggest decline, ranging from 10-13 basis points.
Ultimately, this led to a relatively quiet week in the CMO space. Investors that were active honed in on the same part of the coupon stack that has been seeing the most action, 1.00% – 2.00% cuts. On the lower end of the range, some 1.00% – 1.25% GNR issues off 3.00% collateral traded. Other investors moved up the stack, purchasing 1.50% – 2.00% FNR and FHR issues off jumbo collateral with an average coupon of 2.75%.
Despite Treasury yields falling last week, rates are meaningfully higher than where they started the year. As a result, there has a been less demand for prepay friction collateral (low-loan balance, 100% NY, etc.). For information on collateral types and prepayment data, please see our latest MBS Prepay Commentary, released October 5. Additionally, the Treasury and CMO sections from last week’s Investment Alternatives Matrix are included below.
In case you missed it last week, the October trade summary is below.
Monthly Trade Summary
This week, we will focus on summary analytics for CMO trades executed in October. Yields for the 2-, 3-, and 5-year Treasury each increased more than 20 basis points during the month. As regular readers know, this is the portion of the curve in which our customers typically traffic in the CMO space. Given how steady CMO spreads have been, it is no surprise that projected yields on new purchases last month increased by roughly the same amount as their comparable maturity Treasury.
Investors extended out slightly in October with fixed-rate purchases averaging a 4.1 year WAL, up from 3.8 and 3.1 the two prior months, but right in line with June and May data. From a yield perspective, investors benefited greatly by extending out only marginally to earn a projected 20+ additional basis points. Last month’s average projected yield of 1.46% is the highest monthly average we have seen since February of 2020, when the average yield purchased was 1.67%.
While there was some floating-rate activity last month, fixed-rate bonds accounted for the overwhelming majority of trades at 95%. When looking at class type/structure, investor buying behavior in October was very similar to what we’ve seen in recent months. PACs continue to account for the most trades in this sector, averaging around 60% over the last 4 months.
Lastly, a few words on coupons. Customers have been most engaged with lower coupon cuts in this space. Generally speaking, that has meant 1.00% – 1.25% cuts during the early part of the year. As rates have increased, more investors are looking to 1.50% coupons as prices have declined and can generally be found at slight discount to par handle dollar prices.
Travis Nauert, CFA
Analyst, Investment Strategies