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