When seeking to maximize income with the potential for strong returns, investors should consider agency mortgage-backed securities (MBS) as a valuable asset class. These securitized products offer a unique combination of high quality and affordability, making them an attractive option in today’s market. Leslie Falconio, head of taxable fixed income strategy at UBS Americas, highlights the advantages of agency MBS, emphasizing their current yields of around 5.7% and minimal credit risk due to their backing by government agencies like Fannie Mae, Freddie Mac, and Ginnie Mae. With cash flows tied to the interest and payment on a pool of mortgages, agency MBS provide stability and liquidity in a changing economic landscape.
Falconio underscores the relative value proposition of agency MBS compared to other fixed income options, particularly investment-grade corporate bonds. Despite lagging behind higher-quality counterparts previously, agency MBS are now positioned as an attractive investment opportunity due to their affordable pricing and potential for strong returns. Falconio specifically recommends current-coupon mortgages within the agency MBS space as a strategic choice for investors seeking to capitalize on the market dynamics.
Investors interested in exploring agency MBS can leverage exchange-traded funds (ETFs) as a convenient and cost-effective way to access this asset class. Falconio highlights key ETF options such as the iShares MBS ETF (MBB) and the Janus Henderson Mortgage-Backed Securities ETF (JMBS), each offering unique features in terms of expense ratio and yield. These ETFs provide investors with diversified exposure to agency MBS, allowing for flexibility and ease of portfolio management.
While short-term interest rate volatility may impact the performance of agency MBS, Falconio remains optimistic about the long-term outlook for these securities. As the market adjusts to changing economic conditions and potential Fed rate cuts, agency MBS are poised to benefit from lower interest rates and increased demand. Falconio predicts that banks, in particular, will turn to agency MBS as a strategic investment choice, driven by the need to secure higher yields amidst a slowing economy.
UBS anticipates a positive shift in the yield curve environment, with agency MBS set to benefit from this trend. As economic conditions evolve and the market landscape stabilizes, agency MBS are expected to gain momentum, attracting both institutional and retail investors seeking income and capital appreciation. The reversal of the negative impact of the inverted yield curve on agency MBS signals a potential uptick in performance and resilience in the coming months.
Agency mortgage-backed securities offer a compelling opportunity for investors looking to enhance their income potential while maintaining a focus on quality and value. By capitalizing on the unique features of agency MBS and leveraging ETFs for efficient exposure, investors can navigate the market dynamics with confidence and strategic foresight. As the economic landscape evolves and interest rates fluctuate, agency MBS stand out as a resilient and attractive asset class for income-seeking investors.