/institutional/perspectives/sector-views/agency-mbs-policy-and-inflation-risks-have-led-to

Agency MBS: Policy and Inflation Risks Have Led to Attractive Valuations in Agency MBS

Off-the-run Agency CMBS, low pay-up specified pools, and locked-out CMO structures are attractively priced in the current environment.

August 02, 2022


This Agency Mortgage-Backed Securities sector report is excerpted from the Third Quarter 2022 Fixed-Income Sector Views.

Much like in the first quarter, mortgage spreads underperformed in the second quarter as uncertainty over inflation and the Fed response boosted rate volatility and kept most mortgage buyers on the sidelines. Option-adjusted spreads ended the quarter at 46 basis points, 22 basis points wider quarter over quarter. The Bloomberg Barclays U.S. MBS Index second quarter total and excess returns were -4.01 percent and -0.98 percent, respectively. In contrast, Agency CMBS posted second quarter excess returns of 0.50 percent. Overall, the Agency multifamily sector has benefitted from a better convexity profile, capped issuance and reduced Fed dependency compared to the single-family sector.

The main event in the second quarter was the decision by the Fed to speed up the pace of monetary tightening. In addition to rate hikes, questions around the timing and scale of potential Fed sales of its mortgage holdings added another unknown for mortgage investors to digest. This resulted in a spike in both realized and implied rate volatility and weighed on the sector, with nominal spreads the widest since 2008 excluding the initial COVID selloff. Despite this negative backdrop, some positive developments are presenting themselves. With almost the entire mortgage-backed securities universe out-of-the-money to refinance and slowing home sales, net supply forecasts continue to be revised downward. Additionally, higher rates will make the scheduled Fed runoff more manageable and well below the terminal $35 billion per month cap. These two positive factors may make it worthwhile to increase exposure to the sector, given the historically wide nominal spread levels. A drop in rate volatility will be needed for sustained outperformance, but this is something we do not recommend trying to time given the typical rapid speed of repricing in the sector.

Against this backdrop, we favor investments in which either the collateral or structure offers some cash flow stability to buffer against potential continued elevated rate volatility. We find select subsectors, including off-the-run Agency CMBS, low-pay up specified pools, and locked-out collateralized mortgage obligation (MBO) structures, attractively priced in the current environment. We believe that these investments should provide cash flow certainty in the current rate environment and continue to benefit when the market focus returns to cash flow fundamentals.

30-Year Current Coupons Look Attractive as Rising Rates Deter Refis

30-Year Current Coupons Look Attractive as Rising Rates Deter Refis

Source: Guggenheim Investments, Bloomberg. Data as of 7.15.2022.

—By Aditya Agrawal and Louis Pacilio

 
Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk.

Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

©2022, Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC.

GPIM 53601


FEATURED PERSPECTIVES

November 21, 2022

A Strong Credit Market Shapes the Default Outlook

The stress in this credit cycle is driven by unforgiving high interest rates.

November 10, 2022

Fourth Quarter 2022 Fixed-Income Sector Views

Market and value updates by sector.

November 04, 2022

The Jobs Data Trend Is Duration’s Friend

October jobs data suggests a cooling labor market.


VIDEOS AND PODCASTS

Fed Day: The Argument for 100 Basis Points 

Fed Day: The Argument for 100 Basis Points

Scott Minerd, Guggenheim Partners Global CIO and Chairman of Guggenheim Investments, joins Bloomberg TV on Fed Day.

Macro Markets Podcast 

Macro Markets Podcast Episode 25: Fixed-Income Pain Giving Way to Opportunity

Anne Walsh, Chief Investment Officer for Fixed Income, on the economic and credit cycle, and on risk and opportunity across the fixed-income landscape.







© Guggenheim Investments. All rights reserved.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.