According to Bankrate’s Mortgage Rates, the national average for a 30-year fixed mortgage is 6.61%. That’s uncomfortably high and a major headwind to many prospective homebuyers, particularly those in the first-time category. But it’s not all bad news in the mortgage market. Confirming opportunity abounds for fixed income investors with ETFs such as the WisdomTree Mortgage Plus Bond Fund (MTGP ), some experts view mortgage-backed securities (MBS) as one of the more fundamentally sturdy corners of the bond market.
The actively managed MTGP, which turns seven years old in November, sports a 30-day SEC yield of 4.31%. That’s impressive when considering the scant credit risk typically associated with MBS. The case for the WisdomTree ETF is fortified by a robust fundamental outlook.
“Agency mortgage-backed securities fundamentals remain supported by a combination of elevated mortgage rates, limited refinancing incentives, constrained housing turnover, and low net supply,” noted BNP Paribas.
More MTGP Tailwinds
As noted above, high mortgage rates are drags on residential real estate activity. Those rates are barriers to entry for many buyers, which morphs into a problem for sellers. However, that situation can be a boon for MBS.
For example, high mortgage rates limit originations, keeping a lid on new MBS supply. Add to that, today’s high rates cap refinancing activity, because many existing homeowners bought those residences at rates below what’s being offered today, meaning there’s no reason for them to refinance. Then there’s the issue of prepayments.
“Prepayment behaviour has therefore remained relatively stable and well behaved,” added BNP Paribas. “The June prepayment report showed an 11% decrease in 30-year Federal National Mortgage Association aggregate speeds, with elevated mortgage origination rates slowing refinancing activity more than anticipated in higher coupons.”
MTGP’s status as an actively managed ETF may be attractive to advisors and income investors for a variety of reasons, including narrowing MBS spreads and a valuation case that isn’t as overtly positive as it was a few months ago.
“However, with mortgage rates limiting refinancing activity, net supply low, and demand supported by multiple investor bases, the medium-term outlook remains constructive, with carry likely to be the dominant return driver,” concluded BNP Paribas.
MTGP has an effective duration of 5.33 years and an annual expense ratio of 0.45%.
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