The anticipation of interest rate cuts is adding intrigue into the bond market, but mortgage rates are also starting to come down. In turn, this could spark interest in mortgage-backed securities (MBS).
The Street reported that mortgage rates have been on the decline as of late, potentially giving prospective home buyers something to cheer about. According to the Mortgage Bankers Association (MBA), the average rate for a 30-year fixed conventional loan of
U.S. mortgage rates tumbled last week, with more declines likely heading into the autumn months, following a big bond-market rally tied to the "Federal Reserve’s":https://www.thestreet.com/dictionary/f/federal-reserve interest rate signaling of less than $766,550 is now 6.23%, which is a full percentage point lower than the rate in late April.
Likewise, mortgage applications are also higher for home purchases, rising 1.4% in the previous week. Additionally, the MBA’s refinancing index rose 6.4 points, signaling that current homeowners are also jumping on the lower interest rates.
“Mortgage rates have been on the decline since May 2024, prompting a pickup in refinance activity, which remains limited to a smaller segment of homeowners with higher rates,” said the MBA’s vice president and deputy chief economist Joel Kan. "As a result, the increase in credit availability was the result of lenders broadening their refinance offerings to meet the greater demand.”
Diversifying a Core Bond Portfolio
Mortgage-backed securities can help investors diversify their core bond portfolio amid the current bond rally. If MBS assets rally alongside bonds, then investors may want to take a look at the +Vanguard Mortgage-Backed Securities Index Fund ETF Shares+ (VMBS ). MBS can also offer income diversification as bond yields fall, giving fixed income investors another avenue for passive income.
The fund offers a low expense ratio of 0.04%. To help minimize credit risk, VMBS holdings focus on MBS issued by government-owned corporations like Ginnie Mae and government-sponsored enterprises like Fannie Mae. Both of these quasi-government entities help to provide liquidity in the mortgage market by buying and selling mortgages in the secondary market, so their role is essential. Thus, this backing adds to the relative quality of these assets.
Salient features of VMBS:
- Seeks to provide a moderate and sustainable level of current income.
- Invests primarily in U.S. agency mortgage-backed pass-through securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
- Moderate interest rate risk, with a dollar-weighted average maturity of three to 10 years.
- 30-day SEC yield of 3.75% as of September 10
For more news, information, and analysis, visit the Fixed Income Channel.
