Unlocking Hidden Opportunities in Mortgage-Backed Securities

Investing in mortgage-backed securities presents an opportunity for investors to capitalize on the current housing market turmoil. With soaring housing costs and stubborn mortgage rates making it difficult for many to afford a home, buying mortgage-backed securities could be a way to seek revenge on the housing market.

These securities, particularly those backed by Fannie Mae and Freddie Mac with US government backing, offer an opportunity that is often overlooked by bond pundits fixated on the Federal Reserve. With low refinancing rates due to high mortgage rates, agency-backed MBSs are in a sweet spot, free from the usual push and pull of refinancing that affects yields.

As Treasury bond prices rise, agency MBS prices usually rise less, but in the current market conditions, agency MBS prices should rise more due to the lack of refinancing. This presents an opportunity for investors to benefit from higher total returns as bond prices rise.

Investors interested in taking advantage of this opportunity can consider investing in ETFs such as VMBS and SPMB, which provide access to agency MBSs with minimal trading costs and better pricing. Individual investors may struggle to manage agency MBSs directly due to high trading costs and lack of liquidity, making ETFs a more practical choice.

So, while high mortgage rates may be frustrating for those looking to buy a home, investors can turn the tables by investing in mortgage-backed securities and potentially benefitting from the hidden opportunity in the housing market.