It stands to reason that the Federal Reserve’s decision earlier this month to buy $40 billion of mortgage-backed securities per month will drive the prices of these bonds higher.
So experts tell The Wall Street Journal that investors should take advantage of the quantitative easing (QE) by purchasing these bonds.
“At the very least, you want to overweight that sector," David Ader of CRT Capital Group tells the paper. "That's the sector where you know you have a buyer of 100 percent of everything coming out for an indefinite period of time."
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To be sure, some of the move already has been baked into the cake.
The iShares Barclays MBS Bond exchange-traded fund (MBB), which tracks a mortgage bond index, gained 0.5 percent in the day after the Fed’s announcement, its biggest one-day increase in the last year.
Still, as you can see from the magnitude of that move, volatility isn’t a major concern now.
And most of the bonds are backed by government-sponsored enterprises, such as Fannie Mae and Freddie Mac. So, they carry an implicit government guarantee, giving investors some safety.
But be wary of jumping into the bonds with both feet.
“As MBS [mortgage-backed securities] spreads continue to tighten, there will be a point at which the Fed might deem distortions in the MBS market to be unacceptable and use other asset classes,” specifically Treasuries, Nomura analysts write in a report obtained by Bloomberg.
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