CMO Market Update

September 30, 2019

Sticking with the quarter-end theme from the overall commentary, CMO spreads were mostly unchanged from July through September. There was movement week to week, of course, but ultimately spreads landed about where they began the third quarter. The one exception was the 5-year space, where PACs and Sequentials tightened 5 and 7 basis points, respectively. Otherwise, spreads for 3- and 10-year CMOs didn’t budge.

Interestingly enough, CMO yields traded in a fairly wide range. But this shouldn’t be too surprising given the drop in Treasury yields. For reference, the 3-, 5-, and 10-year Treasurys fell 13, 21, and 33 basis points in yield, respectively, during the period. So, given the consistency in spread levels, something had to give, and that something was yield.

With that said, the first and second quarters still count, and CMOs remain one of the few product types, along with MBS, to have seen notable spread widening in 2019.

Next week, we’ll look at the monthly trade summary for September. It will be interesting to see what the analytics on trades look like. Throughout the year, we have seen reduced VADM activity with the drop in rates. Overall, though, customers’ preferences have been consistent, looking for structured cashflow with close to a 3-year Weighted Average Life and an Effective Duration of 2.5.

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