Some fixed income experts believe amid a recent surge in volatility in the bond market, now’s the time for investors to consider asset-backed securities. These include mortgage-backed securities.
The actively managed WisdomTree Mortgage Plus Bond Fund (MTGP ) answers the bell. One of the benefits of ABS, including MBS and funds like MTGP, is that these bonds typically carry floating rates. That means they’re less vulnerable to interest rate shocks than traditional fixed-rate debt.
“One of the features is the floating rate. Here we don’t have any duration. All the assets are floating rate notes. So, it might be good to have this type of asset as a diversification,” noted David Favier of BNP Paribas.
As the fund manager points out, another benefit associated with asset-backed bonds — one applicable to the bonds held by MTGP — is that this form of debt is backed by assets. That implies some level of protection for investors. That’s particularly so when buying highly rated ABS and those at the top tier of the issuer’s capital structure.
MTGP: Strong Credit Quality on the Cheap
As is the case with quality stocks, elevated costs of admission can come in to play regarding highly rated bonds. That means strong credit quality can be associated with lofty valuations. However, that’s not always the case. And current valuations for some highly rated ABS are attractive.
“If you look at the AAAs, which are the largest supply in the market, I continue to see them as cheap,” added Favier. “Spreads are roughly in line with what we’re expecting for the future. I don’t believe they will widen when you see the small supply and the high interest and the money, we have in the system to invest in these assets.”
Much More Than Mortgage Bonds
That’s pertinent in discussing MTGP. And that’s because about 96% of the ETF’s holdings AAA, AA, or A ratings. MTGP could offer other advantages relevant over the near to medium term. The ABS market includes much more than mortgage bonds. Professional investors can access vehicles securitized by auto loans or other forms of consumer debt.
However, credit card debt in the U.S. continues soaring to record highs. And there are concerns about rising delinquencies in the auto loan space. For now, defaults are low, but those signs of stress largely aren’t applicable in the MBS market. And that indicates MTGP could be a prudent way for investors to tap asset-backed debt.
For more news, information, and analysis, visit the Modern Alpha Channel.
This article was prepared as part of WisdomTree’s general paid sponsorship of VettaFi | ETF Trends. This specific content within and any opinions expressed therein belong solely to VettaFi and do not reflect the opinion or analysis of WisdomTree, its employees, or its affiliates. Content published on VettaFi | ETF Trends is provided for educational purposes only and should not be considered investment or tax advice. For investment or tax advice, please consult a financial professional.
WisdomTree is an independent company, unaffiliated with VettaFi | ETF Trends. WisdomTree has not been involved with the preparation of the content supplied by VettaFi | ETF Trends. It does not guarantee, or assume any responsibility for its content.
