Why Invest in Mortgage-Backed Securities (MBS)?
Mortgage-backed securities are one of the largest sectors of the global fixed income market, offering investors a variety of potential benefits, including:
- A broad and diverse opportunity set
- MBS are backed by U.S. homes and the majority are collateralized by conforming loans and issued by the mortgage Agencies. The mortgage Agencies, Fannie Mae, Freddie Mac, and Ginnie Mae, are mandated by Congress to assist in the provision of financing in the U.S. housing and mortgage markets.
- Attractive yield premium to Treasuries and swaps with over 30 years of price history
In addition to these primary benefits, MBS offer other potential benefits as well. MBS are among the most liquid fixed income securities in the world, and are attractive risk-based capital assets under Basel 1 and 2.1
MBS also have been among the world’s most attractive opportunities for alpha in broader fixed income portfolios due to the fact that trading is usually dominated by accounting and regulatory-constrained investors. These constraints can create attractive opportunities for total return investors. Because of the many potential benefits MBS may offer, financial institutions continue to make substantial allocations to MBS.