State of the CMO and MBS Market – Midyear 2025 (Basic Fundamental Analysis)

Author: Chris Folse, Advisor, Catalyst

Halfway through 2025, the market for bonds tied to home loans – known as CMOs (Collateralized Mortgage Obligations) and MBS (Mortgage-Backed Securities) – are going through some changes. These changes are primarily driven by the overall economy, government policies, and what people anticipate regarding interest rates. Here’s a straightforward look at what’s happening.

Agency CMO Market: issuance down, demand selective

In June, the number of new CMOs being created was the lowest so far this year, falling by 27% from last month to $22.1 billion. This drop mainly comes from fewer “conventional” CMOs, while another type, called Ginnie Mae CMOs, increased and now make up about two-thirds of all new CMOs. Investors are showing more interest in these because they offer better protection and more predictable returns.

MBS Market: a slowdown in structural adjustments

The total amount of new MBSs issued this year is expected to be approximately $1.2 trillion, representing a slight decline compared to last year. Fewer people are buying or financing homes due to affordability concerns caused by higher rates. Recently, as markets have calmed down, some large investment firms have resumed buying these bonds, seeking stable income.

Themes & outlook: cautious bullishness amid evolving risk

Investors are focusing on bonds that balance good returns with some protection against changes in interest rates and early loan payoffs. Many prefer bonds with collateral rates at or below market levels to limit accelerated principle pay-backs if mortgage rates decline into the second half of the year.

Bottom line

At midyear, the CMO and MBS markets are being shaped by lower interest rates, changing spreads, and careful investors. The most popular options right now are bonds backed by government agencies and those that offer protection against early payoffs.  Picking the right balance of risk and reward will be key for anyone investing in these markets for the rest of 2025.

For credit unions, the current state of the CMO and MBS markets presents both opportunities and challenges. With issuance slowing and demand becoming more selective, especially for agency-backed securities, credit unions have a chance to pick up high-quality, lower-risk investments that align well with their asset-liability needs. However, with fewer refinancing and purchase-driven loans currently flowing through the system, organic loan production may slow, making the importance of portfolio strategies even more pronounced. 

Credit unions should continue to focus on duration management, yield opportunities in agency CMOs and MBS, and protection against extension and prepayment risk, all while staying nimble in response to shifting rate expectations heading into the back half of the year.

Catalyst – your financial partner 

Understanding the many opportunities and risks inherent in MBSs, CMOs, and other asset options can be daunting – that’s why Catalyst is here to help. Our dedicated team of experts can help develop your asset strategy while minimizing risk and maximizing upside to prepare for tomorrow. With brokerage, ALM, loan participation, liquidity, subordinated debt, and asset management solutions available, Catalyst can help bring your strategy to life. For more information, contact Catalyst today.

Sources: Bloomberg, Wells Fargo