/perspectives/sector-views/agency-mbs-fed-leads-the-way
Agency Mortgage-Backed Securities: Fed Leads the Way
Fed stabilizes MBS sector despite record low mortgage rates.
Mortgage spreads continued to tighten over the fourth quarter as the Fed and heavy bank demand offset prepayment concerns due to mortgage rates hitting all-time lows. Option-adjusted spreads ended the quarter at 41 basis points, 22 basis points tighter quarter over quarter and effectively unchanged year over year.
Fed Intervention Helped Stabilize Mortgage Spreads
Bloomberg Barclays Agency MBS Index OAS
Option-adjusted spreads ended the quarter at 41 basis points, 22 basis points tighter quarter over quarter and effectively unchanged year over year.
Source: Guggenheim Investments, Bloomberg. Data as of 12.31.2020
The Bloomberg Barclays U.S. MBS Index fourth quarter total return and excess return were 0.22 percent and 0.34 percent, respectively. Agency MBS 2020 total returns totaled 3.84 percent, which lagged all other subsectors of the Bloomberg Barclays U.S. Aggregate Index. Notably, Agency CMBS—which offer better convexity and capped issuance—posted fourth quarter and 2020 total returns of 0.50 percent and 8.92 percent, respectively.
Since the start of QE4, mortgage spread performance has been bifurcated between production coupons buoyed by over $1 trillion in Fed purchases and “non-Fed” coupons exposed to primary rates at all-time lows.
Historically Low Mortgage Rates Boost Agency MBS Relative Performance
Since the start of QE4, mortgage spread performance has been bifurcated between production coupons buoyed by over $1 trillion in Fed purchases and “non-Fed” coupons exposed to primary rates at all-time lows.
Source: Guggenheim Investments, Bloomberg. Data as of 12.31.2020
Fed purchases remove the most negatively convex bonds and boost the carry profile of “to-be-announced” (TBA) securities, which has resulted in the outperformance of lower coupons versus the mortgage index. Given the small percentage of the index that lower coupons comprise and the Fed’s stated intention to continue with $40 billion of monthly net purchases, this is a trend we expect to continue. Primary rates remain near all-time lows at well below 3 percent despite the recent rates selloff, leading call-protected subsectors of the market, including specified pools and Agency CMBS, to enjoy some of their best relative performance in recent memory. Heading into 2021, we expect heightened prepay concerns to remain as mortgage originators increase capacity to meet demand and capitalize on record profitability.
Against this longer-term outlook, we favor investments where either the collateral or structure offers some cash flow stability. We find select subsectors—especially those not directly purchased by the Fed—attractively priced in the current environment, including off-the-run Agency CMBS, select specified pools, and locked-out collateralized mortgage obligation structures. These investments enjoyed strong performance prior to Fed intervention, and we expect similar results when the Fed eventually reduces the pace of its Agency MBS purchases and the market's focus returns to cash flow fundamentals.
—Aditya Agrawal, CFA, Director; Louis Pacilio, CFA, Vice President
Important Notices and Disclosures
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
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 of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
©2021, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC.
VIDEOS AND PODCASTS
Maria Giraldo, CFA, Managing Director, Investment Research, and Evan Serdensky, Director, Portfolio Management, provide our macro and markets outlook.
U.S. Economist Matt Bush analyzes the latest Fed announcement and labor and inflation data, Investment Strategist Maria Giraldo discusses credit risk while the Fed tightens, and Managing Director Chris Keywork updates on the bank loan market.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 03.31.2022 and includes leverage of $20.0bn. 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 Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
This is not an offer to sell nor a solicitation of an offer to buy the securities herein. GCIF 2019 and GCIF 2016 T are closed for new investments.
©
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such 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. All content has been provided for informational or educational purposes only and 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. Investing involves risk, including the possible loss of principal.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as
Institutional Investors. To change this, update your
preferences.
United States Important Legal Information
By confirming below that you are an Institutional Investor, you will gain access to information on this website (the “Website”) that is intended exclusively for Institutional Investors and, as such, the information should not be relied upon by individual investors. This Website and any product, content, information, tools or services provided or available through the Website (collectively, the “Services”) are provided to Institutional Investors for informational purposes only and do not constitute a recommendation to buy or sell any security or fund interest. Nothing on the Website shall be considered a solicitation for the offering of any investment product or service to any person in any jurisdiction where such solicitation or offering may not lawfully be made. By accessing this Website, you expressly acknowledge and agree that the Website and the Services provided on or through the Website are provided on an as is/as available basis, and except as partnered by law, neither Guggenheim Investments and it parents, subsidiaries and affiliates nor any third party has any responsibility to maintain the website or the Services offered on or through the Website or to supply corrections or updates for the same. You understand that the information provided on this Website is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. You also agree that the terms provided herein with respect to the access and use of the Website are supplemental to and shall not void or modify the Terms of Use in effect for the Website. The information on this Website is solely intended for use by Institutional Investors as defined below: banks, savings and loan associations, insurance companies, and registered investment companies; registered investment advisers; individual investors and other entities with total assets of at least $50 million; governmental entities; employee benefit (retirement) plans, or multiple employee benefit plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; member firms or registered person of such a member; or person(s) acting solely on behalf of any such Institutional Investor.
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”