CMO Market Update
September 28, 2020
Last Week’s Activity
Cut coupons continue to be in focus for CMO investors. Last week, the trade desk was most active in coupons ranging from 1.00% – 2.00% off 2.00% – 2.50% collateral, with some of those trades involving Jumbo collateral. Also, while fixed-rate bonds account for the majority of activtity, floating-rate product is in demand as well. SOFR based floaters continue to gain traction as market participants plan for the transition away from LIBOR.
As mentioned in recent weeks, swap activity has increased after months of outright cash investing. With September and Q3 coming to a close this week, the focus on year end begins. September pricing will be updated in our Client Access portal tomorrow where customers can find an updated gain/loss estimated 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.
CMO spreads to Treasury yields tightened 2 basis points for fixed and floating-rate bonds. For the maturities and stuctures we monitor, spreads are at or just above their lows for the year. Investors demanding a higher return will have to take on some premium risk for collateral involving the prepay friction story. Bonds backed by 100% NY, 100% Investor Property, and Low Loan Balance collateral have printed slower prepayment speeds compared to non specified pools in recent months.
August 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