CMO Market Update

October 26, 2020

Spreads to Treasury yields for fixed-rate agency CMOs tightened 2 basis points for the second consecutive week. Spreads for floating-rate bonds were unchanged. As shown below, spreads are approaching or extending their lows for the year as steady tightening has been underway since the summer.

It was another active week with investors purchasing bonds primarily outright from cash and showing interest in a number of products and collateral types. Themes discussed in recent weeks remain in focus: low coupon cuts, prepay friction collateral (low loan balance, 100% NY, etc.), jumbo collateral, and floating-rate bonds.

The Monthly Trade Summary for September was released last week. For those that missed it, please see below.

Monthly pricing and analytics will be updated tomorrow 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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