Following the Federal Reserve’s September interest rate cut, mortgage rates surprisingly have not declined. They’ve actually increased and that might be one of the reasons why mortgage-backed securities (MBS) have retreated in recent weeks.
The recent retrenchment experienced by MBS could provide an opportunity for income investors to examine exchange traded funds such as the WisdomTree Mortgage Plus Bond Fund (MTGP ). Fixed income market participants are considering adding more duration to portfolios following the Fed rate cuts. So MBS could be an attractive destination.
Regarding MTGP, the ETF could be an effective way of adding duration without going too far out on the curve. Obviously, mortgages themselves are typically 15- or 30-year fare, fitting the bill as “long-dated.” But for its part, MTGP has an effective duration of 5.58 years. That’s intermediate-term territory. And that indicates the ETF could be more responsive to further rate cuts than short-term bonds while not possessing the rate risk of long duration issues.
MTGP Offers Bond Benefits
Plus, as measured by spreads, MBS offer value. Spreads on investment-grade and junk-rated corporate debt are at relatively low levels. That signals potentially inadequate compensation for the added risk, MBS spreads are far more appealing today.
“Keep in [mind MBS] spreads tend to trade in a relatively tight range when you exclude the surge from the early weeks of the COVID-19 pandemic in [2020. And] current levels are just five to 10 basis points above the 10-year average,” added Martin. “That seems attractive considering that investment grade and high-yield spreads are well below their long-term averages and still close to their cyclical lows.”
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