CMO Market Update

October 5, 2020

CMO spreads to Treasury yields were unchanged last week. As seen in the condensed Yield and Spread Snapshot from the overall commentary, CMO spreads have been in a tight range for the last month.

The trade desk is seeing sustained activity in SOFR based floating-rate product, including bonds in the Agency CMO and CMBS spaces. If interested in a barbell strategy, these instruments could be worth considering for the floating-rate leg.

In the fixed-rate space, low coupon cuts are seeing the most trades. Customer purchases last week involved cuts off 2.0% collateral, or higher-coupon, low-loan balance collateral (3.5-4.0 w/ 110-225k max). Both in the MBS and CMO sectors, investors continue to find value in bonds with prepay friction, such as collateral involving low-loan balance, 100% NY, or 100% Investor Property. This has been discussed in many of our recent publications, and we’ll get an update on the data when October prepayment speeds reflecting activity in September are released later this week. Be on the lookout for our commentary to follow.

Next week, we will have the Monthly Trade Summary for September. It will be interesting to see the breakdown of trades by coupon type given the steady activity with floating-rate bonds that we’ve seen in recent weeks. Floating-rate bonds have accounting for about a quarter of CMO trades over the last three months.

As mentioned in recent weeks, swap activity has increased after months of outright cash investing. With September and Q3 coming to a close last week, the focus on year end begins. September pricing has been updated in our Client Access portal where customers can find an updated gain/loss estimate for their holdings. Purchases from earlier this year might stand at attractive gains given the spread tightening we’ve seen throughout the summer and into the fall. If you are not signed up, please click on the following link to submit a registration request.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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 © 2021
This is a publication of Vining-Sparks IBG, L.P.
775 Ridge Lake Blvd., Memphis, TN 38120