Key takeaways:
- The $9.8 trillion agency MBS market represents the second largest and second most-liquid bond market in the world, behind only the U.S. Treasury market.
- With their defensive characteristics, additional yield over U.S. Treasuries, and high credit ratings due to their government backing, we believe an allocation to MBS may be a key strategic holding within a diversified portfolio.
- Because agency MBS display a high level of idiosyncratic risk (risk that is particular to a specific investment) due to the large number of factors affecting their prices, we believe the asset class is well suited to active management.
Mortgage-backed securities are collections of residential mortgages with similar characteristics that are packaged together, or securitized, and sold to investors. Agency MBS are issued or guaranteed by one of three U.S. government or quasi-government agencies: Fannie Mae, Freddie Mac, and Ginnie Mae. Due to their government guarantee, all agency MBS carry the U.S. government’s AA+ credit rating.
Agency MBS make up about 27% of the Bloomberg U.S. Aggregate Bond Index and about 12% of the Bloomberg Global Aggregate Bond Index. Therefore, most investors with U.S. or Global Agg-like portfolios have exposure to agency MBS.