/perspectives/sector-views/agency-mbs-the-fed-has-spoken-now-it-is-the-market
Agency Mortgage-Backed Securities: The Fed Has Spoken, Now It Is the Market's Turn
The Fed’s tapering program may pressure Agency MBS, but it could also increase investment opportunities.
Agency MBS performance was positive in the third quarter, driven largely by tighter spreads and carry as the quarter ended with marginally higher rates and a flatter yield curve. Range-bound rates, low volatility, and reasonable valuations relative to other credit sectors have resulted in tighter Agency MBS spreads as investors continue to look for opportunities to add high-quality assets to their portfolios. Prepayments speeds were steady over the quarter. Fed policy has been well-telegraphed and the market has digested it so far, but Agency MBS spreads have the potential to widen from here as levels are historically tight and supply is expected to increase as Fed holdings decline. Conversely, a flattening yield curve could improve duration-hedged carry for Agency MBS. This attractive carry could dampen the impact of any spread widening. Relative-value opportunities will also likely increase in Agency MBS as the Fed withdraws from the market and its influence on valuations decreases. We are watching factors that have been supportive of Agency MBS so far—especially the benign prepayment environment, mortgage real estate investment trusts with price/book ratios above 1.0, bond fund inflows, robust bank demand, repo availability, and fair valuations compared to credit sectors—to spot signals for a change in the current market environment. In short, the nightmare scenario of dramatic spread widening with reduction of the Fed’s balance sheet holdings is not likely to materialize in the short run.
Refi Incentives No Longer Carry the Same Prepayment Risk for Agency MBS
Relative-value opportunities will likely increase in Agency MBS as the Fed withdraws from the market and its influence on valuations decreases. We are watching factors that have been supportive of MBS so far—especially the benign prepayment environment.
Source: JP Morgan, Goldman Sachs, eMBS, Guggenheim Investments. Data as of 9.29.2017. CPR = conditional prepayment rate.
The Bloomberg Barclays U.S. MBS index posted a 1.0 percent total return and 0.5 percent excess return over Treasurys with similar durations in the third quarter. Yields ended the quarter at 2.8 percent, lower from the previous quarter, while spreads were roughly 10 basis points tighter over the quarter. Conventional MBS outperformed Ginnie Mae MBS, 30-year MBS outperformed 15-year MBS, and lower coupons outperformed higher coupons.
We currently favor less negatively convex assets where either the collateral or structure offers some cash flow stability. Accordingly, we find select subsectors attractively priced in the current environment, including longer-maturity Agency multifamily, new collateral types recently introduced by the government-sponsored enterprises, and some collateralized mortgage obligation structures. We continue to avoid asset classes, such as Ginnie Mae MBS, where valuations are relatively stretched and may be affected more by the Fed’s policies or change in regulatory regime.
MBS Spreads Tighten in the Third Quarter, Despite Fed Runoff Announcement
The Bloomberg Barclays U.S. MBS index posted a 1.0 percent total return and 0.5 percent excess return to like-duration Treasurys in the third quarter of 2017. Yields ended the quarter at 2.8 percent, lower from the previous quarter, while spreads were roughly 10 basis points tighter over the quarter.
Source: Bloomberg, Guggenheim Investments. Data as of 9.29.2017.
—Connie Fischer, Senior Managing Director; Aditya Agrawal, CFA, Director
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, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management. ©2017, 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
Scott Minerd, Chairman of Investments and Guggenheim Partners Global CIO, joins Bloomberg TV on Fed Day to discuss the Federal Reserve’s largest rate hike since 1994.
Jenny Marler, head of Guggenheim Real Estate, focuses on hotels and hospitality, and Jerry Cai, a Vice President in the Macroeconomic and Investment Research Group, reviews the Fed’s decision and other data.
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 06.30.2022 and includes leverage of $18.3bn. 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.”