CMO Market Update

October 19, 2020

Spreads for fixed-rate agency CMOs tightened 2 basis points last week. Spreads for floating-rate bonds were unchanged.

The CMO Desk saw good activity across different products last week. Low coupon cuts (< 2.0%) remain in demand, as well as bonds off 2.0% to 3.0% jumbo collateral. Also, multiple trades were executed involving LIBOR and SOFR based floating-rate bonds. Interest in floating-rate bonds has been meaningful throughout the summer and now into the fall as discussed below in the September Monthly Trade Summary.

Monthly pricing and analytics will be updated next week on our Client Access portal. For those with access, this will give you a chance to review updated gain/loss estimates as year-end planning is underway. If you do not have access but would like to register, please click here.

Monthly Trade Summary

Yield Book analytics for CMO Trades in September are in line with previous months. The average yield purchased declined slightly as rates remain near historic lows and models are projecting elevated prepayment speeds. Additionally, customers are, on average, investing in bonds with a 2-3 year average life. A more attractive yield is attainable by extending out on the curve to bonds with a 4-5 year average life.

As mentioned above, floating-rate bonds continue to account for a meaningful percentage of trades. Nearly 20% of CMO trades in September involved floating-rate bonds. This is near the low end of the range we’ve seen over the last five months. In May and July, floating-rate bonds accounted for 37% and 32% of trades, respectively.

Looking at trades by class type: PACs were down slightly from August but close to 20%. Sequentials lead the way by a mile as investors clearly continue to favor short, front-loaded sequentials.

We are already more than halfway through October, so it won’t be long before a new Monthly Trade Summary is available. It will be interesting to see how investor trends evolve as we approach year-end.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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