Capital Markets Outlook
March 18, 2019
Agency vs. non-agency mortgage-backed securities
Jason Callan, Senior Portfolio Manager and Head of Structured Assets
Some of the most attractive risk-adjusted returns have really come from investments that focus on the recovering housing market.
Agency mortgages are very high-quality government-guaranteed assets. So, the principal is guaranteed by the U.S. government. It comes in three different forms — Fannie Mae, Freddie Mac, or Ginnie Mae mortgages. They trade at a significantly lower risk premium or spread for the investor because the government guarantees the ultimate repayment of those bonds. Your real risk in agency mortgages is around prepayment risk, or the uncertainty of the timing by which you're going to get your cash flows back.
On the non-agency side, the market is very different. Your exposure there is around the strength and the likelihood of the U.S. consumer to ultimately make good on those payments and make good on the mortgages. So, you have a much more direct exposure to the combination of the strength of the U.S. consumer as it relates to not only their profile, but the underlying strength of the housing market.
Agency mortgages have significantly greater degrees of exposure to interest rate risk. When we think about, you know, what is the risk premium for a given investment vehicle, agency mortgages have a lot more duration, so therefore, are much more sensitive to changes in interest rates. Whereas non-agency securities offer, traditionally, much more attractive risk premiums or overall yield profiles with significantly less sensitivity to changing interest rates.
The views expressed are as of April 2018, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.
Mortgage- and asset-backed securities are affected by interest rates, financial health of issuers/originators, creditworthiness of entities providing credit enhancements and the value of underlying assets.
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