Mortgage-backed securities are becoming a “terrific alternative” to other asset classes seen as safe, such as US Treasuries and investment-grade corporate bonds, said Harley Bassman, managing partner at Simplify Asset Management.
Spreads on the securities -- bonds backed by home loans, with payments supported by the US government -- have been widening all year, as investors fret about inflation and Federal Reserve rate hikes plus the central bank cutting back on its holdings of mortgage debt, wrote interest-rate derivatives expert Bassman on a June 1 note.
Spreads have widened to levels that are hard to pass up, Bassman wrote.
“Vanilla MBS are crazy cheap (on both a historical and analytical basis), and I would encourage financial professionals to carefully consider them for client portfolios,” wrote Bassman.
The $9 trillion mortgage market is going through a shock as the Fed goes from the largest MBS buyer to retreating from the securities. The central bank is cutting back on reinvesting principal now, capping its monthly runoff at $17.5 billion until September. The policy change has meant that there will more securities in the market up for grabs.
That said, the securities could cheapen even more, he said, as the Fed cuts back further on reinvesting principal.
“I am waiting for one more card to be turned over. MBS cheapened by 75bps as soon as the Fed announced they would stop buying; let’s see what happens when the Fed lets their balance sheet run down by up to $95bn/month,” wrote Bassman.
Bassman joined Simplify Asset Management last year, having previously worked for 26 years at Merrill Lynch, where he created the implied volatility gauge for US Treasuries known as the MOVE Index.
This article was provided by Bloomberg News.