Quality and yield both matter to us
We believe we can tap into relatively attractive income and risk-adjusted return potential by investing flexibly across different sectors in the bond markets. Non-traditional income sources such as securitised debt1 is one of the asset classes in our search for quality and yield opportunities in an overall bond portfolio1.
Agency mortgage-backed securities (MBS) are guaranteed by US government-related bodies, such as Ginnie Mae, Fannie Mae and Freddie Mac, and they are generally AAA-rated. MBS pooled from commercial mortgage loans are called commercial mortgage-backed securities (CMBS).
As illustrated below, agency MBS and CMBS have exhibited relatively similar trends of volatility as US Treasuries over the 10-year period between 1 September 2012 and 31 August 2022.
Volatility trends of US Treasuries, agency MBS and CMBS over the past 10 years
Source: Bloomberg, J.P. Morgan Asset Management. Data as at 31.08.2022. MBS refers to mortgage-backed securities, CMBS refers to commercial mortgage-backed securities. Indexes used are: Bloomberg US Treasury Index (US Treasury), Bloomberg US CMBS Index (CMBS), Bloomberg US MBS Index (Agency MBS). The Bloomberg US MBS Index tracks fixed-rate mortgage-backed pass-through securities issued by Ginnie Mae, Fannie Mae and Freddie Mac. Volatility refers to 30-day moving average data covering the period from 01.09.2012 to 31.08.2022. Indices do not include fees or operating expenses and are not available for actual investment. Past performance is not a reliable indicator of current and future results.
Since the beginning of 2022, we see compelling opportunities in these securitised assets. While positioning our overall fixed income portfolio currently, agency MBS and CMBS play a defensive role as they present income opportunities that are relatively higher than US Treasuries. We prefer higher coupon agency MBS because of the advantage of elevated yields, while also improving the overall quality of our securitised asset allocation. We also favour multi-family CMBS because of supportive long-term demographic trends while short-term leases can also allow these properties to increase rents and cash-flows as inflation stays elevated.