High Quality Assets Have Attractive Valuations and Solid Yields Despite Volatility

In today’s unpredictable financial landscape, one option that investors may want to consider is agency mortgage-backed securities (MBS), according to asset management firm Janus Henderson. These securities, which are bundles of mortgages backed by government-sponsored entities such as Fannie Mae or Freddie Mac, have shown historical resilience during market downturns.

‍

John Kerschner, who heads U.S. securitized products at Janus Henderson and also manages portfolios there, highlighted agency MBS as a stable option amid ongoing market volatility. On the day President Donald Trump revived his threat of increased tariffs—this time targeting Apple and the European Union—stocks took a hit, and U.S. Treasury yields pulled back from recent highs. In this environment, Kerschner believes agency MBS could serve as a safer harbor for investors.

‍

One reason Kerschner favors agency MBS is their relative value compared to investment-grade corporate bonds. While corporate bond spreads remain tight due to strong investor demand and limited supply, agency MBS spreads are wider, primarily because of current supply challenges. As a result, agency MBS appear cheaper and more attractive from a yield perspective.

‍

“If investors are worried about heightened market swings, trade uncertainty, or potential tax policy changes,” Kerschner explained, “agency MBS offer about 140 basis points more in yield than Treasurys while maintaining a similar level of credit quality.” Essentially, investors can earn a higher return without taking on significantly more credit risk.

‍

Despite the turbulence that followed the first round of tariff threats earlier this year, agency MBS had their strongest performance through April since 2020, Kerschner noted. The Janus Henderson Mortgage-Backed Securities ETF currently delivers a 30-day SEC yield of 5.11% and carries a low expense ratio of just 0.22%.

‍

Kerschner is not alone in seeing the value in this asset class. Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, has also added mortgage-backed debt to his portfolio, particularly during price declines caused by the April selloff. Rieder manages the iShares Flexible Income Active ETF and sees MBS as a reliable opportunity when market volatility drives down prices.

‍

“When interest rate volatility spikes, it tends to push MBS prices lower, creating a buying opportunity,” Rieder said. He also praised the high quality and strong liquidity of agency MBS. BlackRock offers a dedicated ETF for this asset class, the iShares MBS ETF, which currently offers a 4.22% 30-day SEC yield with an extremely low expense ratio of 0.04%.

‍

Although supply has been a concern in the sector—largely due to the Federal Reserve reducing its holdings of agency MBS—Kerschner believes this situation could improve. Banks, which have traditionally been major buyers, have recently stepped away from the market because of the uncertain interest rate environment. However, with signs that the Fed may pause its rate-cutting agenda, interest rate volatility could decline, potentially luring banks back into the market.

‍

Kerschner noted that projections for mortgage supply are already being revised downward. A combination of reduced volatility, potential bank reentry, and lower supply could create more favorable technical conditions for agency MBS going forward.

‍

Agency MBS are also a prominent feature in the portfolio of Bryan Whalen, Chief Investment Officer at TCW and a generalist portfolio manager. In the TCW Flexible Income ETF, which he helps manage, agency MBS account for around 22.5% of the fund. This ETF currently offers a 30-day SEC yield of 5.9% and a total expense ratio of 0.40%.

‍

Whalen sees these securities as a good income-generating option while waiting for price appreciation. While agency MBS normally trade at a smaller spread over Treasurys than corporate bonds, they currently offer a spread about 65 basis points higher than corporates, giving investors an unusually good deal.

‍

“In an environment where yields remain erratic,” Whalen explained, “agency MBS provide a solid income stream as investors wait for price and spread normalization.” This suggests a long-term investment horizon is necessary—investors must be patient and believe that eventually interest rates will stabilize and market volatility will recede.

‍

Whalen likened the current period to a temporary pause, a “waiting place” before markets return to a more stable yield curve. Once this occurs, he believes more institutional buyers, who have stepped away in recent years, may reenter the MBS market, boosting demand and prices.

‍

In summary, while markets continue to react to geopolitical uncertainties and shifting interest rate expectations, agency mortgage-backed securities stand out as a relatively safe and rewarding fixed-income option. With higher yields than Treasurys and resilient credit quality, they offer both institutional and retail investors an appealing way to weather market turbulence.

‍