CMO Market Update

September 21, 2020

CMO spreads were unchanged yet again last week and have been in a consistent range since early August. The below image is intended to give readers context for where CMOs are generally trading in terms of dollar price, yield, and spread. This information is sourced from our weekly Investment Alternatives Matrix and has been condensed to show only Treasurys and CMOs.

Investor Activity and Trends

The trade desk continues to facilitate two-way flow as swap activity is picking up. As far as CMOs are concerned, the following themes have been noteworthy: (1) jumbo collateral where wider spreads are available (2) low cut coupons and call protected collateral (3) and, as discussed in the Monthly Trade Summary below, floating rate bonds.

Some follow up on call protected collateral: our MBS Prepayment Commentary was released earlier this month. As stated in the publication, “conventional coupons of approximately 3.0 and lower saw speeds increase by more than a token amount and, while higher coupons technically declined, they really remained largely the same.” Conversely, and as charts in the piece display, collateral types such as 100% NY, 100% Investor Property, and Low Loan Balance pools have provided meaningful protection from the higher speeds in non spec. pools.

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Monthly Trade Summary

Analytics on CMO trades in August are largely in line with recent months. The average projected yield purchased dropped month-over-month as prepay projections continue to remain elevated in this low rate environment. Additionally, short, front-loaded cashflows fell back in favor after some investors started reaching for yield by extending out on the curve in July. You can see this as the average WAL purchased jumped in July, but during August fell back in line with recent months.

Once again, floating rate investments were meaningful, accounting for nearly a quarter of trades. SOFR based floaters left inventory about as quickly as they arrived, but customers were quite active in bonds linked to other indexes as well.

As previously stated, sequentials fell back in favor and that structure dominated activity by class type as a result. 3 of the 4 previous months, however, showed a fairly even distribution between sequentials and PACs.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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