In Short: Mortgages aren't offering a lot of value


Federated recently shifted from neutral to a 5% underweight on residential mortgage-backed securities (MBS) in our sector portfolio model for three key reasons: 1) supply has been larger than expected on subdued bank activity; 2) volatility remains very low; and 3) the Fed has signaled plans to initiate balance-sheet reduction by year-end, adding supply to a market where there’s plenty already. These three forces, on top of already tight spreads between agency MBS and comparable maturity Treasuries, mean there’s just not a lot of value in mortgages at this juncture. So are we trimming the allocation to this sector and putting it to use in the credit market, where spreads and coupons offer the potential for more attractive returns. We expect to remain light on MBS until we get some volatility and significant widening in agency MBS spreads.

Todd Abraham
Todd Abraham, CFA
Senior Portfolio Manager, Head of Government/Mortgage Backed Fixed Income Group