Mortgage-backed securities: Priced for imperfection?
Head of U.S. Securitized Products John Kerschner and Portfolio Manager Nick Childs explain why they believe key risks are now largely priced in to fixed income markets, with selective areas – particularly mortgage-backed securities (MBS) – presenting an opportunity to provide favourable risk-adjusted returns.
1 minute read
- Following an increase in yields and a widening of credit spreads, MBS are now pricing in a lot of bad news.
- While risks like interest rate volatility and supply concerns weighed on returns in 2022, we think the sell-off in MBS has been overdone.
- In our opinion, the additional income offered by MBS relative to U.S. Treasuries, combined with the potential for normalization of valuations, makes the asset class attractive from a valuation perspective.
Fixed income investors have welcomed a positive start to 2023 after a very tough year in 2022. Last year, as inflation soared, bond prices were hit simultaneously with rising interest rates and widening credit spreads culminating in the Bloomberg U.S. Aggregate Bond Index (Agg) registering its worst year since 1999. As painful as this sharp drawdown was for investors’ portfolios, in our view, a lot of bad news is now priced in. While there is potential for more volatility, we believe there are opportunities in selective areas of fixed income.