Mull Mortgage-Backed Securities for Reduced Treasury Risk

When it comes to bonds, advisors and investors are searching for appealing levels of income and reduced Treasury in preparation of the Federal Reserve potentially disappointing regarding multiple rate reductions this year. Mortgage-backed securities (MBS) could be an ideal segment of the fixed income market for investors looking to keep income levels high while mitigating Treasury risk.

Select exchange traded funds, including the WisdomTree Mortgage Plus Bond Fund (MTGP), provide efficient access to MBS. Subadvised by Voya Investment Management Co., MTGP is actively managed, indicating it can nimbly react to changes in monetary policy if need be. That, coupled with diversification, could make the ETF a compelling option in the current environment.

Mortgage ETF MTGP Can Spruce Up Bond Portfolios

As advisors know, many clients may have too much exposure to Treasurys and not enough to alternative bond segments that can generate income without adding credit or rate risk. MTGP can solve those issues.

“One of the biggest asset classes in the U.S. bond market is agency mortgage-backed securities (MBS), which can be a way for advisors to diversify clients’ portfolios with investment-grade credit that has been trading at attractive levels. Agency MBS could also serve as a diversifier for investors seeking to reduce U.S. Treasury exposure,” according to BlackRock research.

Of course, MBS, including MTGP holdings, aren’t risk-free bets. Nothing besides cash is. However, prepayment risk, one of the primary uncertainties associated with these bonds, is waning. That’s because many homeowners capitalized on low interest rates in 2022 and 2021 to refinance their mortgages, according to BlackRock. That was smart ahead of the 2022-23 interest rate hikes. And implies many homeowners are comfortable with current obligations and aren’t seeking to eliminate mortgage debt over the near term.

Another point that could work in favor of MTGP is that the Fed is essentially absent from the MBS market, which has pushed yields on mortgage bonds higher. That means MBS offer fixed income investors yield premiums relative to some Treasurys and select investment-grade corporate bonds.

MTGP could also benefit as interest rate volatility wanes and if the Fed sends clear signals regarding its rate reduction plans.

“With inflation moderating and the Fed likely approaching the end of the hiking cycle, we expect rate volatility to subside, making agency mortgages an attractive high-quality asset to own over the coming year,” concluded BlackRock.

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