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

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