Amid the volatility, these high-quality assets have attractive valuations — and solid yields

Amid market volatility driven by renewed tariff concerns, investment firms like Janus Henderson, BlackRock, and TCW are highlighting agency mortgage-backed securities (MBS) as attractive investment opportunities. Agency MBS offer higher yields relative to Treasuries, with Kerschner of Janus Henderson noting a 140 basis point advantage, and are currently trading at a spread of 65 basis points above corporate bonds, an unusual premium. Experts anticipate reduced mortgage supply due to the Federal Reserve's balance sheet adjustments and banks pulling back amid interest rate volatility, potentially setting up better technicals for the sector as interest rate volatility subsides.

Analysis

Amid heightened market volatility, underscored by renewed tariff threats against entities including Apple and the European Union which prompted a retreat in Treasury yields, financial institutions such as Janus Henderson, BlackRock, and TCW are advocating for agency mortgage-backed securities (MBS) as a resilient investment. John Kerschner of Janus Henderson highlights that agency MBS, backed by the federal government, have historically weathered market selloffs and are currently offering a yield approximately 140 basis points above U.S. Treasurys with comparable credit quality, noting their best start to a year since 2020 as of April 30. This asset class is also presented as relatively inexpensive compared to investment-grade corporate bonds, with Bryan Whalen of TCW observing an unusual spread of about 65 basis points above corporates. Rick Rieder from BlackRock concurs, citing the opportunity to acquire these securities at lower prices during periods of increased rate volatility, and emphasizing their good liquidity and quality. The supply dynamics for agency MBS are evolving; while the Federal Reserve's balance sheet reduction has increased supply, a pullback by banks due to interest-rate sensitivity, combined with Wall Street revising down mortgage supply projections, is expected to lead to 'better technicals.' Kerschner anticipates reduced interest rate volatility, potentially as the Federal Reserve defers rate cuts, which could encourage bank re-entry and further support the sector. Illustrative investment vehicles include the Janus Henderson Mortgaged-Backed Securities ETF (JMBS) with a 5.11% 30-day SEC yield, the iShares MBS ETF (MBB) offering a 4.22% yield, and the TCW Flexible Income ETF (FLXR) with a 5.9% yield.

Key Decisions for Investors

• Investors should consider allocating to agency mortgage-backed securities for their potential to offer attractive yields, currently around 140 basis points over Treasuries and 65 basis points over corporate bonds, coupled with strong credit quality amidst market uncertainty.
• Monitor Federal Reserve communications and interest rate volatility trends, as a stabilization or decline in volatility, alongside anticipated reductions in new mortgage supply, could further enhance the investment case for agency MBS.
• Evaluate specific agency MBS focused ETFs, such as JMBS, MBB, and FLXR, based on their respective 30-day SEC yields (ranging from 4.22% to 5.9%) and expense ratios, aligning choices with individual income requirements and risk tolerance.
• A long-term investment horizon may be beneficial, allowing investors to capture current income while positioning for potential price appreciation and spread tightening as interest rate conditions normalize and institutional buyers potentially increase their participation.