CMO issuance fell in June to $42 billion. This is the second consecutive month this has happened, according to a recent Lehman Brothers report. By contrast, supply in May reached $50 billion and totaled $70 billion in April. The dip in issuance is no surprise, said Lehman, because the low mortgage rates kept banks on the sidelines.

CMO issuance has traditionally been spurred by par-priced tranche buyers. However, IO buyers have now become the principal drivers of CMO deals. This is due to the deluge of structured IO supply, which averages $7.5 billion 5.5% IO equivalents each month, as well as issuer-related prepayment concerns. The end result has been an overall improvement in the convexity of collateral, shifting toward lower loan balances, higher SATOs and less exposure to faster prepaying issuers.

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