MBS fundamentals firm as mortgage rates stay high

Agency mortgage-backed securities have shown firmer fundamentals after months of elevated mortgage rates, limited refinancing activity and low net supply. The actively managed WisdomTree Mortgage Plus Bond Fund (MTGP) reports a 30-day SEC yield of 4.31%.

The national average 30-year fixed mortgage rate is 6.61%. Higher rates have reduced refinancing activity and cooled home sales by making refinancing uneconomical for many homeowners who hold lower-rate loans and by discouraging some potential buyers. Those trends have kept new mortgage originations and the flow of fresh agency MBS relatively low.

BNP Paribas noted: “Agency mortgage-backed securities fundamentals remain supported by a combination of elevated mortgage rates, limited refinancing incentives, constrained housing turnover, and low net supply.” The firm reported that prepayment patterns have been steadier than some analysts expected after rate moves.

A June prepayment report showed an 11% decrease in 30-year Federal National Mortgage Association aggregate speeds. Slower prepayments can extend the effective life of MBS holdings and affect yield and duration profiles for investors.

MTGP is an actively managed exchange-traded fund that will mark its seventh anniversary in November. The fund holds agency MBS, has an effective duration of about 5.33 years and an annual expense ratio of 0.45%.

BNP Paribas added that with low net supply and sustained investor demand, carry-the income component of returns-is likely to be the main driver of medium-term performance. The firm said prepayment behaviour “has therefore remained relatively stable and well behaved,” and described the outlook as constructive for the period ahead.

Investors should note that narrowing spreads and shifting valuations have changed the sector’s risk-reward profile compared with earlier in the year. Agency MBS generally carry limited credit risk because they are issued or guaranteed by government-sponsored entities, but they remain sensitive to interest-rate moves and duration exposure. The current pattern of limited new supply and muted refinancing has supported prices and yields while moderating turnover in benchmark indices.