Buyers Returning to MBS Market | ETF Trends

Flush with cash, domestic banks are looking to put some of that capital to work in credit markets. Recent data suggests those institutions are wading back into the collateralized loan obligation (CLO) and mortgage-backed securities (MBS) markets.

Should banks continue being eager buyers of MBS, that could support the outlook for the WisdomTree Mortgage Plus Bond Fund (MTGP). The actively managed fund sports a 30-day SEC yield of 3.71%. That indicates there’s a solid income proposition tied to MBS. And that yield is all the more enticing when considering credit risk with MTGP is minimal. It has minimal risk because MTGP allocates 85.32% of its weight to MBS with “AA” ratings.

MTGP’s yield could be appealing to income investors on another front. As of the end of January, more than $6 trillion was sitting in money market accounts and the like. Yields on those cash instruments will decline if Treasury yields do the same. The same goes for MTGP, but the ETF offers investors upside potential. That’s something not available with cash.

Banks Betting on MBS

Adding to the case for MTGP is banks’ renewed affinity for MBS. That’s taking on new meaning because typical avenues for generating returns on capital are somewhat constricted currently.

“Amid an upturn in deposits, banks are searching for ways to put this new cash to work,” reported Scott Carpenter for Bloomberg. “The traditional option — boosting lending — is hard to do right now, though, after two years of interest-rate increases that curbed loan demand and pushed up defaults. That’s left banks to park more money in high-quality securities that they believe will boost returns without heaping on too much credit risk.”

The news outlet reported that Citigroup Inc., JPMorgan Chase & Co., and Bank of America are among the commercial banks that have recently increased purchases of MBS. That comes as MBS valuations, potentially another catalyst for MTGP, are coming off trough-type levels.

Additionally, the return of large-scale buyers to the MBS market signals those participants are confident prepayment risk is declining and that residential mortgage holders can meet their obligations.

“In agency MBS, where banks have largely been missing in action for over a year, holdings have climbed by $74 billion since late October. Gross purchasing of Ginnie Mae mortgage bonds almost doubled in the latest quarter, according to Citigroup strategists,” reported Bloomberg.

That’s relevant to investors considering MTGP. That’s because agency debt, including Ginnie Mae bonds, are among the holdings found in the WisdomTree ETF.

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