MBS Day Ahead: When Will Luck Run Out For MBS vs Broader Bond Market?
Posted To: MBS Commentary
In the bond market, as a whole, we've never seen yields any lower for any longer than they've been in 2020. The runners up aren't even close. Even though bonds have become increasingly commoditzed (think "buy to sell" as opposed to "buy and hold"), the buy and hold crowd still exists, and it still has an impact on trading levels. The relationship between Treasuries and MBS makes that clear. Simply put, MBS offer higher yields compared to Treasuries, but with effectively zero default risk (federally back-stopped Fannie/Freddie protect the investor from borrower default). Investors only need to worry about risks relating to how long any given MBS will last. If rates fall too quickly, MBS coupons can pay off too quickly as the underlying mortgages are refinanced…(read more)