CMO Market Update

September 23, 2019

Treasury yields dropped across the curve last week, leaving Agency CMO spreads 2 basis points wider for bonds longer than 2 years. CMO spreads are still within an arm’s reach of highs for the year. Conversely, yields are around 20 basis points off their 2019 lows reached in August.

Of the sectors we monitor, MBS and ACMOs are the only two to experience appreciable spread widening year-to-date. CMO spreads have widened roughly twice as much as MBS spreads, around 25-30 basis points in total depending on the length of the bond.

We have written repeatedly, and believe it is worth mentioning again, that investing in “cut-coupon” CMOs (e.g. 3.0 coupon off of 3.5 collateral) is one way to capture value in this space. This approach can help customers find lower dollar prices and protect against underperforming yields. Treasury yields remain low and it is reasonable to expect that mortage prepayment speeds will remain elevated.

If there is any residual interest in the August Trade Summary, click here.

Travis Nauert, CFA

Analyst, Investment Strategies

Vining Sparks IBG, LP

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