Published Date: February 10, 2026
Author: HANetf
Why Agency CMO Floaters?
Agency CMO floaters performed particularly well during the fourth quarter of 2025 as market conditions increasingly favoured front-end spread products with strong carry and limited duration exposure. As interest-rate volatility declined into year-end and the yield curve modestly steepened, investors gravitated toward floating-rate structures that could efficiently capture elevated short-term rates while minimising extension risk. These characteristics allowed Agency CMO floaters to deliver stable total returns despite broader year-end positioning pressures across fixed income.
Technical factors further supported fourth-quarter performance. Floater issuance slowed meaningfully into December due to typical seasonal dynamics and year-end balance-sheet constraints, while demand remained steady too strong. This supply-demand imbalance helped stabilise spreads and supported secondary market performance. Within the sector, Ginnie Mae floaters remained particularly well bid, reflecting investor preference for government-guaranteed exposure combined with short effective duration.
Banks continue to be the dominant buyer base, attracted by SOFR-linked cash flows, short spread duration, and favourable capital treatment. Overseas accounts and money managers also remained active, particularly in Ginnie Mae floaters.
Past performance is not indicative of future performance and when you invest in ETFs your capital is at risk.
These factors above helped limit spread volatility and reinforced the defensive profile of Agency CMO floaters heading into year-end, establishing a constructive base entering 2026.
Issuance in 2026 is expected to remain healthy but measured. Ginnie Mae collateral should continue to anchor floater production, while overall cap distributions are likely to remain cantered on 6.5% and 7.0% structures. A steeper yield curve could incentivise banks to rotate incrementally toward longer-duration fixed-rate CMOs, potentially softening marginal floater demand without undermining the core buyer base.[4]
Several structural and technical factors should continue to support performance in the Agency floating‑rate CMO market through 2026. Agency mortgage spreads have benefited from a steeper yield curve, a broad and diverse buyer base, and low-rate volatility. On a historical and cross‑asset basis, Agency mortgage spreads remain attractive, particularly given their liquidity profile and strong carry characteristics relative to other high‑quality spread sectors. Continued or incremental curve steepening would remain supportive for carry and roll dynamics, reinforcing demand for floating‑rate structures.
Policy and regulatory developments could also prove constructive. Potential U.S. government actions aimed at improving housing affordability may offer indirect support to Agency mortgage markets, while a more favourable financial regulatory environment could encourage increased U.S. bank demand for Agency MBS and CMOs. Demand should remain broad‑based, supported by continued participation from the GSEs, mortgage REITs, banks, and overseas investors. Additionally, any decline in mortgage rates that results in a modest pickup in prepayment activity would be beneficial for discount‑priced Agency fixed‑ and floating‑rate securities—particularly those with limited extension risk—further supporting total return prospects for Agency CMO floaters in the year ahead.
[1] Source: Regan Capital
[2] Source: Regan Capital
[3] Source: Regan Capital
[4] Source: Regan Capital
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