CMO Market Update

October 7, 2019

Last week, CMO spreads to Treasurys widened 3 basis points for 3-, 5-, and 10-year PACs and Sequentials. Some widening was expected given the 20+ basis point decline in yield for 3- and 5-year Treasurys week-over-week. The 10-year Treasury yield also declined notably, to the tune of 15 basis points. For 2019, CMO yields are near the low end of their range while spreads remain near their highs.

This week, we will examine the September Trade Summary.

September Trade Summary

Although Treasurys maturing in 1 to 6 months declined in yield during September, yields increased for the intermediate and longer portion of the curve. The 2- through 10-year Treasury yields rose between 17 an 22 basis points. Consequently, Agency CMOs purchased last month are projected to yield more than those bought in August. Duration, Convexity, and Weighted Average Lives of investments were consistent with previous months.

The one notable change month-over-month was VADM activity, accounting for 14% of trades. While this isn’t a huge number, it does exceed what we’ve seen for the previous four months. As has been discussed in past updates, if expectations reverse and rising rates become a concern, investors may consider VADMs to avoid extension risk.

Three out of the last four months have seen a roughly equal distribution in trades between Sequentials and PACs. This contrasts with the end of 2018 and start to 2019 when Sequentials tended to dominate activity.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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