Navigating Market Volatility: The Value of Agency Mortgage-Backed Securities
In today’s unpredictable investment landscape, where market fluctuations are almost the norm, investors are often on the lookout for resilient options. One such area worth consideration is agency mortgage-backed securities (MBS). These assets, which are essentially debt obligations created from a pool of mortgages and backed by the federal government, have proven to be reliable even during market sell-offs.
Why Choose Agency MBS?
John Kerschner, head of U.S. securitized products and a portfolio manager at Janus Henderson, emphasizes that agency MBS have historically offered stability amid market turmoil. In the wake of political uncertainties—such as renewed tariffs on tech giants like Apple and ongoing trade tensions between the U.S. and the European Union—many investors are seeking refuge in stable investments.
Attractive Yield
Currently, agency MBS provide an enticing prospect for yield-seeking investors. As Kerschner points out, if you’re concerned about market volatility, agency MBS can deliver approximately 140 basis points more yield than U.S. Treasuries, with comparable credit quality. This is particularly appealing in a climate where investment-grade corporate bonds maintain tight spreads due to robust supply-demand dynamics.
Recent Performance Insights
Despite the turbulent environment following tariff announcements earlier this year, agency MBS managed to deliver the best performance seen in recent years. As of late April, many funds focusing on these securities had noteworthy returns, demonstrating their resilience. For instance, the Janus Henderson Mortgaged-Backed Securities ETF boasts a 5.11% 30-day SEC yield with a modest 0.22% expense ratio—making it a compelling choice for investors looking to gain exposure to this asset class.
The Advantage of Liquidity and Quality
BlackRock’s Rick Rieder recognizes the potential in mortgage-backed debt, particularly when market fluctuations lead to price drops. “When interest rate volatility rises, mortgages can become undervalued," he explains. With solid liquidity and quality, mortgage-backed securities stand out as a sound investment during rocky times. For instance, the iShares MBS ETF offers a 4.22% 30-day SEC yield at an exceptional expense ratio of just 0.04%.
Supply and Demand Dynamics
While there are concerns about the current supply of agency MBS—exacerbated by the Federal Reserve rolling these securities off its balance sheet—experts suggest the supply-demand balance may shift favorably. Banks have become cautious about the interest-rate volatility, which might lead to a reduction in mortgage supply. Kerschner anticipates that as volatility eases, banks may re-enter the market, thereby tightening supply and enhancing technical conditions for agency MBS.
A Long-Term Perspective
Investors should embrace a long-term outlook. Bryan Whalen, chief investment officer at TCW, notes that agency MBS, which constitute about 22.5% of one of TCW’s funds, provide a way for investors to earn income while awaiting price appreciation. With MBS trading at a spread over Treasuries that currently exceeds that of corporate bonds, there is room for potential upside.
Conclusion: A Strategic Investment for Turbulent Times
In summary, agency mortgage-backed securities offer a blend of stability and yield, making them an attractive option for investors navigating a volatile market. At Extreme Investor Network, we believe that disciplined investment strategies—including a focus on high-quality agency MBS—can provide a pathway to achieving long-term financial goals. Keep an eye on this asset class as market conditions evolve, and consider integrating agency MBS into your investment portfolio to weather the storms ahead.
Stay informed and connected with Extreme Investor Network for actionable insights and strategies that align with your investment objectives.