Agency mortgage-backed securities (MBS) are debt obligations backed by the government and issued by agencies like Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are considered a high-quality asset class with minimal credit risk and high liquidity. Leslie Falconio, head of taxable fixed income strategy at UBS Americas, highlights the current yields of around 5.7% for agency MBS, making them an attractive option for investors seeking income.
Falconio emphasizes that agency MBS are relatively cheap compared to investment-grade corporate bonds. Despite lagging behind other fixed income investments due to their correlation to interest-rate volatility, agency MBS are starting to gain momentum this year. Falconio specifically recommends current-coupon mortgages within the agency MBS space as a promising investment.
Investors interested in agency MBS can access this asset class through exchange-traded funds (ETFs). For instance, the iShares MBS ETF (MBB) offers a net expense ratio of 0.04% and a 30-day SEC yield of 3.54%. Alternatively, the Janus Henderson Mortgage-Backed Securities ETF (JMBS) provides a 30-day SEC yield of 5.37% with a net expense ratio of 0.23%.
Falconio predicts a positive outlook for agency MBS, citing potential benefits from lower interest rates and increased inflows into the market. As the economy slows and the likelihood of Fed rate cuts rises, investors are expected to turn to agency MBS for higher yields. Additionally, the negative impact of the inverted yield curve on agency MBS is forecasted to reverse this year, with UBS expecting a normalization of the yield curve by the year-end.
Agency mortgage-backed securities offer investors an opportunity to generate income through a high-quality asset class with relatively low credit risk and high liquidity. With favorable current yields and potential benefits from interest rate movements, agency MBS could be a valuable addition to investment portfolios seeking income generation.