/perspectives/sector-views/agency-mortgage-backed-securities-smooth-sailing

Agency Mortgage-Backed Securities: Smooth Sailing

Steady performance despite market volatility in the first half of 2018 validates the sector’s defensive profile.

August 23, 2018


This Agency Mortgage-Backed Securities sector report is excerpted from the Third Quarter 2018 Fixed-Income Outlook.

Agency MBS spreads have the potential to modestly widen as levels are still historically tight, and 2018 net supply is expected to exceed that of the previous few years, but carry remains attractive and could absorb most of our expected spread widening. We expect the sector to continue to provide diversification and lower volatility within a broad fixed-income portfolio, as the current environment of range-bound rates, low volatility, and reasonable valuations relative to credit sectors will result in support from investors continuing to look for opportunities to add high-quality spread assets. Moreover, relatively steady performance despite market volatility in the first half of this year validates the sector’s defensive profile.

Agency MBS performance was positive in the second quarter despite headwinds in the form of higher rates and a flatter yield curve. The Bloomberg Barclays U.S. MBS index posted a 0.24 percent total return. Yields ended the quarter at 3.41 percent, wider from the previous quarter, while option-adjusted spreads were roughly 1 basis point tighter over the quarter. Conventional MBS underperformed GNMA, 30-year MBS outperformed 15-year MBS, and lower coupons underperformed higher coupons. Prepayments speeds increased marginally over the quarter.

We continue to 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, better call-protected pools, and some collateralized mortgage obligation structures. We continue to avoid assets, such as Ginnie Mae MBS, where valuations are relatively stretched and may be affected more by the Fed’s policies or changes in regulatory regime.

Agency MBS Performance Has Been Relatively Stable Amid Higher Volatility

Cumulative Year-to-Date Total Return

Relatively steady performance in Agency MBS relative to corporates despite market volatility in the first half of this year validates the sector’s defensive profile.

Agency MBS Performance Has Been Relatively Stable Amid Higher Volatility

Source: Bloomberg, Guggenheim Investments. Data as of 6.27.2018.

Agency MBS Spreads Hold Steady in the Second Quarter of 2018

Bloomberg Barclays U.S. MBS Index Spreads

Despite market concerns that the Fed’s balance sheet normalization would cause spreads to widen significantly in Agency MBS this year, we have seen option-adjusted spreads only a little wider since October 2017, and spreads range-bound on a zero-volatility basis. Yields ended the quarter 3.41 percent, higher than the previous quarter, while option-adjusted and zero-volatility spreads are one basis point tighter quarter over quarter.

Agency MBS Spreads Hold Steady in the Second Quarter of 2018

Source: Bloomberg Barclays Indexes, Guggenheim Investments. Data as of 6.29.2018. The zero-volatility spread measures the spread that an investor will receive over the entire Treasury spot rate curve. LHS = left hand side, RHS = right hand side.

—Aditya Agrawal, CFA, Director; Louis Pacilio, 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, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management. ©2018, 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.


FEATURED PERSPECTIVES

November 08, 2019

The Science and Art of Risk Management: Liquidity Risk

Good risk management leads to good decision making.

November 04, 2019

The Risk Mitigation Advantage in Active Fixed-Income Management

Why active has the potential to outperform passive in fixed income.

October 29, 2019

Don’t Be Tempted by CCC Bonds and Loans

Lower-quality credit spreads have more potential to widen than tighten.


VIDEO

Third Quarter 2019 Fixed-Income Outlook 

Third Quarter 2019 Fixed-Income Outlook

Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share insights from the third quarter 2019 Fixed-Income Outlook.

Core Fixed-Income Conundrum 

Solving the Core Conundrum

Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.







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.

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. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.

© 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.