Last week, the Federal Reserve delivered its widely awaited interest rate cut, paring rates by 50 basis points. That potentially signaled the central bank is on track to lower borrowing costs by 150 bps by Q2 2025.
That rate cut and those expectations could spark a variety of fixed income assets, including mortgage-backed securities (MBS). That’s a corner of the bond market accessible via ETFs like the WisdomTree Mortgage Plus Bond Fund (MTGP). MBS are one of the largest corners of the bond market and a low-risk one. That’s because the bonds are backed by government-sponsored entities such as Fannie Mae, Freddie Mac, and Ginnie Mae.
Even with a credit profile that’s comparable to Treasurys, MBS are attractive to income investors. For example, The actively managed MTGP sports a 30-day SEC yield of 3.80%. Its managers can source income opportunities missed by MBS indexes.
MTGP Matters Now
MBS currently offer solid yield advantages over some corners of the investment-grade corporate bond and Treasury market. And mortgage bonds are attractively valued relative to other forms of U.S. government debt. Additionally, MBS have been durable performers.
“In addition to attractive valuations, agency MBS has been one of the top-performing fixed income sectors since the start of the third quarter, up more than 8% in less than three months,” according to WisdomTree research. “Driven by a combination of rate and spread moves, we believe this recent performance is largely explained by investor rotation into high-quality, longer-duration asset classes as the economy starts to slow and the Fed prepares to cut rates.”
Another tailwind could be emerging for MTGP. Over the past several quarters, professional investors have allocated more cash to higher-yielding MBS. Some of those reside in the WisdomTree ETF. Against the backdrop of monetary easing by the Fed, now could be an appropriate time for advisors and investors to consider MTGP. The ETF could also be the ideal way to tap a somewhat sophisticated asset class.
Nuanced Asset Class
“In summary, we believe agency MBS remains an attractive option for investors looking to lock in yields and extend duration into high-quality fixed income ahead of the upcoming Fed rate cut cycle,” added WisdomTree. “However, agency mortgages are a nuanced asset class, and investors should be fully aware of the risks involved in strategies that target single cohorts of the sector with the allure of higher yields.”
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