Bank Failures Put Additional Pressure on Mortgage-Backed Securities

Fixed Income Chart of the Month: June 2023

The relative yield of mortgage-backed securities (MBS) to Treasuries has increased over the last two years. This increase has been influenced by decisions made by the Federal Reserve (Fed) and U.S. commercial banks surrounding their purchases and reductions of MBS.

We believe the attractive yield and valuations of MBS make it an opportune time to consider investing in the asset class.

MBS Offer Yield Pickup Relative to Treasuries with Attractive Valuations

Yield spread between a par priced 30-year Fannie Mae MBS security and a 50/50 blended 5 year and 10-year US Treasury.
Source: Bloomberg as of 5/31/23

A brief history of these decisions is as follows:

  • To support the economy and alleviate strains in the financial markets during the COVID pandemic, the Fed purchased $1.3 trillion in MBS between March 2020 and May 2022. Commercial banks followed suit, increasing their MBS holdings by $800 billion during the same period.
  • In May 2022, the Fed reversed course when it announced it would discontinue MBS purchases and begin the process of reducing its balance sheet. Since then, it has decreased these holdings by nearly $150 billion while commercial banks have decreased their MBS holdings by roughly 10%. 
  • After the failures of Silicon Valley Bank and Signature Bank in March, the Federal Deposit Insurance Corporation (FDIC) started liquidating their MBS portfolios.

Learn more about SBH’s Fixed Income Strategies.

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