Mortgage-Backed Securities: a compelling investment choice

By Tom Mansley, Investment Director for MBS Strategies at GAM

Investing in Mortgage-Backed Securities is particularly attractive as the asset class is maturing, relative to others, and they offer some unique advantages. Fundamentals remain solid, especially in the current challenging macroeconomic and political environment. The stability provided by MBS is crucial for investors' portfolios, as it offers a combination of diversification from corporate risk, low defaults and high recovery rates in the event of default.

Within the asset class, non-agency residential MBS (RMBS) issued before the 2008-09 credit crisis benefit from a substantial equity buffer. This defensive positioning allows investors to earn attractive returns even with a conservative portfolio. RMBS offer significantly higher yields than US Treasuries with similar maturities, including higher-quality agency bonds as well as non-agency debt. Attractive returns can be achieved without having to sacrifice credit quality.

Overall, we consider Mortgage-Backed Securities to be a compelling investment choice, as they offer stability, attractive yields and low correlation to other asset classes. We believe RMBS spreads should remain stable from 2025 onwards