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The Appeal of Mortgage-Backed Securities for Income Investors
The Attractiveness of Mortgage-Backed Securities
Mortgage-backed securities (MBS) are gaining attention from investors searching for income. These debt obligations are tied to the principal and interest payment of a pool of mortgages. Leslie Falconio, head of fixed income strategy at UBS Americas, believes that AAA-rated agency MBS can yield as high as 5.5% to 6%. Even Jeffrey Gundlach, the bond king, is a fan of MBS, stating that they present an attractive entry point in the agency mortgage market due to their attractive spreads and lack of negative convexity. Falconio expects agency MBS to outperform in the second half of the year, primarily due to the declining interest rate volatility caused by the Federal Reserve's rate hikes.
The Case for Mortgage-Backed Securities in a Fixed-Income Portfolio
Luis Alvarado, a fixed income strategist at Wells Fargo, sees MBS as a potential replacement for investment-grade corporate debt. While Alvarado remains neutral on MBS, he believes that the macroeconomic environment and value pockets are starting to turn the bias more positive. The recent widening of spreads on mortgages presents opportunities for tactical investment strategies. Money managers and financial advisors are attracted to MBS with coupons ranging from 4% to 6%, while regular investors can access MBS through mutual funds or exchange-traded funds (ETFs). Alvarado recommends choosing an actively managed fund to take advantage of potential interest rate volatility.
Cautionary Outlook on Commercial Mortgage-Backed Securities
Alvarado and Wells Fargo have downgraded commercial mortgage-backed securities (CMBS) to unfavorable due to concerns about the deterioration of commercial real estate values. Both Alvarado and Falconio are waiting for a better entry point for CMBS and non-agency MBS. Slower growth in the second half of the year may cause spread volatility, according to Falconio.
Conclusion: The Impact on New Businesses
The appeal of mortgage-backed securities (MBS) for income investors presents an interesting opportunity for new businesses looking to raise capital or generate income. The high yields offered by AAA-rated agency MBS, as highlighted by Leslie Falconio, and the attractive spreads and lack of negative convexity emphasized by Jeffrey Gundlach, make them an appealing option for income-seeking investors.
For new businesses, MBS can provide an alternative to traditional investment-grade corporate debt. Luis Alvarado's view of MBS as a potential replacement for corporate debt suggests that new businesses can tap into the MBS market to fund their operations or expansion plans.
Furthermore, the recent widening of spreads on mortgages creates opportunities for tactical investment strategies. This means that new businesses with a strategic approach to their investment decisions can take advantage of these opportunities to maximize their returns.
However, caution should be exercised when considering commercial mortgage-backed securities (CMBS), as Alvarado and Wells Fargo have expressed concerns about the deterioration of commercial real estate values. New businesses must carefully assess the risks associated with CMBS and consider waiting for a better entry point before venturing into this sector.
In conclusion, new businesses can explore the appeal of MBS as a potential source of income and capital. By carefully evaluating the market, choosing the appropriate investment strategies, and being mindful of the risks associated with CMBS, new businesses can leverage the benefits offered by MBS to strengthen their financial position and achieve their growth objectives.
Article First Published at: https://www.cnbc.com/2023/07/24/investing-in-mortgaged-backed-securities.html.svg)
