With 10-year Treasury yields hovering around 4.84%, the flirtation with 5% is ongoing and dangerous, spooking many fixed income investors in the process. However, it pays to remember that performances across the bond market are not linear. Said another way, while 4.84% 10-year yields aren’t a ringing endorsement of bonds in a broad sense, there are pockets of opportunity in the fixed income universe today. Those include mortgage-backed securities (MBS), an asset class accessible via exchange traded funds such as the (MTGP ).
While MBS are backed by government-sponsored entities (GSEs) such as Fannie Mae, Freddie Mac and Ginnie Mae, these bonds and MTGP holdings are not the same as Treasurys – a positive trait at a time when U.S. government debt is under duress.
Even with MBS ties to government-backed agencies, the asset class offers a yield advantage over Treasurys of comparable duration. With an embedded income yield of 6.52%, MTGP highlights as much.
Tailwinds Emerging for MTGP
While there are myriad headwinds currently confounding the broader bond market, the opposite is arguably true of the MBS space. That could be a sign opportunity with MTGP beckons.
“The current yield premium offered by agency MBS compared to Treasuries suggests that the bad news from this year may be priced in,” according to WisdomTree research. “Indeed, this mortgage basis spread is now at the higher end of the historical ranges, and it even looks attractive compared to credit spreads on investment-grade corporates.”
The yield advantage offered by MTGP over some investment-grade corporate bond strategies is all the more noteworthy when considering the fact that the ETF allocates over 91% of its weight to MBS rated AAA, AA or A, meaning it has a quality advantage over standard corporate bond offerings.
Another source of allure with MTGP is value. There are some discounted MBS in the market today and as an actively managed ETF, MTGP can potentially take advantage of that situation.
“Low-coupon MBS have generally outperformed higher coupons because of a lack of supply and persistent fund inflows (demand), primarily in passive index products. This situation has led to a decisive difference in comparative value across the coupon stack but with very few willing to go against it,” adds WisdomTree.
Leveraging macro and fundamental research, MTGP attempts to deliver risk-adjusted returns that outpace those offered by the widely followed Bloomberg U.S. Securitized Index. The ETF carries an annual expense ratio of 0.45%.
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