CMO Market Update
September 9, 2019
Last week saw mixed movement in Treasury yields and little change in CMO spreads. It is still worth noting that CMO spreads are one of few places where spreads have actually widened on a year-to-date basis. Certainly, part of the spread widening is due to increased prepayment risk. However, we are seeing increased CMO activity as investors look for yield in a sector with comparatively wide spreads. Prepayment speeds were released over the weekend and, at a high level, printed faster then the previous month, but at first glance, nothing eye-popping. We will have the full prepay commentary available this afternoon.
August Trade Summary
Investors were very engaged in the CMO sector during August. Yields purchased dropped for fixed rate bonds, which is not surprising given the way Treasurys have declined. However, CMO spreads are still within arm’s reach of 2019 highs measured in June.
As is usually the case, fixed-rate buying dominated. With rates so low in general, it’s not surprising to see VADMs accounting for such few trades. However, if sentiment were to shift and rate expectations reverse, investors may look to that product type for more predictable cashflows if extension risk becomes a more likely concern. Another trend we are seeing, although not captured in the trade summary below, is more investing in “cut-coupons”.
Kevin Smith, CFA
SVP, Director Investment Product Strategies
Vining Sparks IBG, LP