Weakness in the overall bond market and rising interest rates are hurting debt issues backed by mortgages, but this could be providing value opportunities for investors who are on the hunt for bargains in mortgage-backed securities (MBS).
The U.S. Federal Reserve is offloading a number of assets it accumulated during the height of the pandemic to help shore up the bond market when fears of a default were high. Now, the Fed is looking to offload its assets, including bonds backed by mortgages, which could flood the supply and thus push prices down further.
“Prices are falling for bonds backed by agency mortgage loans from government-owned lenders Fannie Mae and Freddie Mac,” a Wall Street Journal report said. “That is primarily because the Fed has started raising interest rates, which hits the value of all existing fixed-rate bonds, but also because it might start selling some of its $2.7 trillion holdings of the bonds, potentially further diminishing their value.”
Of course, this only opens the pathway for potential bargains to be available in MBS. Exchange traded funds (ETFs) offer easy access to MBS via one fund as opposed to holding various debt positions.
“It is all about the relative value proposition,” said David Finkelstein, chief executive of Annaly.
Getting MBS Exposure in 1 Fund
Fixed income investors looking for bargains can take a look at the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS). VMBS seeks to track the performance of a market-weighted mortgage-backed securities index, and employs an indexing investment approach designed to track the performance of the Bloomberg U.S. MBS Float Adjusted Index, which covers U.S. agency mortgage-backed pass-through securities.
To be included in the index, pool aggregates must have at least $250 million currently outstanding and a weighted average maturity of at least one year. All of the fund’s investments will be selected through the sampling process, and under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.
The fund comes with a minimal 0.04% expense ratio and carries moderate rate risk, limiting exposure to debt issues that don’t go beyond 10 years. As of May 27, the 30-day SEC yield on the fund is just under 2%.
For more news, information, and strategy, visit the Fixed Income Channel.