Tom Mansley, Investment Director, Asset Backed Fixed Income at GAM Investments, discusses the resilience of mortgage-backed securities (MBS) in the current challenging macroeconomic and political environment.
08 April 2025
What are mortgage-backed securities (MBS)?
MBS are debt securities representing claims on pools of home loans and other real estate debt. Investors in MBS receive periodic payments, in the form of monthly principal and interest payments. The US MBS market is very large, with over USD 10 trillion outstanding1 and generally over USD 100 billion of issuance every month over the past 10 years2.
An MBS is a bond that is collateralised by a mortgage or a collection of mortgages and traded on the secondary market. This allows investors to profit from the mortgage business without directly buying or selling home loans. Mortgages are sold to institutions like investment banks or government entities, which package them into MBS that can be sold to individual investors. This process enables banks to lend more freely, acting as intermediaries between MBS investors and home buyers. Typical MBS buyers include asset managers, insurance companies and pension funds.
The MBS market has evolved significantly since the 2008 financial crisis. Today, the market is more regulated and scrutinised, ensuring better protection for investors and more stability overall. We believe these changes have strengthened the market, making it a more secure investment option for the future.
What makes MBS attractive compared to other asset classes?
Investing in MBS is particularly appealing as the asset class matures. Compared to other asset classes, MBS offers some unique advantages. The fundamentals of MBS remain strong, especially in the current challenging macroeconomic and political environment. The stability provided by MBS is crucial for investor portfolios, offering a combination of diversification away 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 2008-2009 credit crisis benefits from a substantial home equity buffer3. This defensive positioning allows investors to achieve attractive yields 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. Compelling yields can potentially be achieved without having to sacrifice credit quality.
Overall, we think MBS stands out as a compelling investment choice, providing stability, attractive yields and low correlation compared to other asset classes. We believe RMBS spreads should remain stable for 2025 and onwards, and we continue to believe that non-agency RMBS spreads, particularly legacy RMBS, remain attractive, especially relative to other markets such as corporate credit in the US.
Focusing on residential, avoiding malls and office
We favour non-agency RMBS issued prior to the 2008-2009 credit crisis, known as Legacy RMBS. These securities provide a more substantial home equity buffer compared to recently issued mortgages. We continue to avoid large retail shopping malls and office buildings, anticipating further market adjustments due to unresolved problem loans in these areas.
In a previous article, “Millennials Shaping the Housing Market”, we discussed how demographic changes, such as people going to the office less, are impacting the market and leading to a shift away from commercial real estate. This shift reinforces our strategy of focusing on residential properties.
Current MBS market outlook
Our outlook for the US housing market remains positive. We believe home prices will stay stable due to the persistent lack of supply and continued demand driven by demographic changes. The homeowner vacancy rate remains near historical lows, indicating a shortage of available houses.
Chart 1: Existing home sales inventory
(From 31 January 1999 to 31 December 2024)
Source: Bloomberg, GAM as at 31 December 2024.
Past performance is not an indicator of future performance and current or future trends.
Past performance is not an indicator of future performance and current or future trends.
Stronger economic data in 2024 has shown the resilience of the US economy and consumers. Unemployment remains low, and mortgage credit is performing well, with the share of mortgage loans in foreclosure hovering at less than 0.5%, levels not seen in over 40 years.
Chart 2: Foreclosures as percentage of total loans not seasonally adjusted (NSA)
(From 31 March 1979 to 31 December 2024)
Source: Bloomberg, GAM, as at 31 December 2024.
Past performance is not an indicator of future performance and current or future trends.
Past performance is not an indicator of future performance and current or future trends.
Interest rate risks are more prevalent now, and volatility has increased. Our investment strategy involves hedging much of the interest rate risk with the aim of reducing portfolio volatility. With reduced volatility and high return expectations, the risk versus return balance currently looks very favourable. The portfolio has a significant allocation to senior bonds backed by mortgages that have been outstanding for over 15 years, where homeowners have substantial equity. This large home equity, combined with low unemployment rates and low household debt levels, should ensure the creditworthiness of the securities in the portfolio, even in the event of a recession.
In our view, based upon the attributes of MBS as described above, combined with a favourable return versus risk profile and currently wide spreads, mean MBS have the potential to be a good portfolio diversifier.
Tom Mansley leads the mortgage-backed securities strategy at GAM Investments.
1Source: The Securities Industry and Financial Markets Association (SIFMA), December 2021.
2Source: The Securities Industry and Financial Markets Association (SIFMA), March 2025.
3A home equity buffer refers to the amount of equity homeowners have in their properties, which acts as a cushion against declines in property values. It means that even if property values were to decrease, the equity buffer helps to mitigate potential losses, making these investments more secure and allowing for attractive yields without compromising credit quality.
2Source: The Securities Industry and Financial Markets Association (SIFMA), March 2025.
3A home equity buffer refers to the amount of equity homeowners have in their properties, which acts as a cushion against declines in property values. It means that even if property values were to decrease, the equity buffer helps to mitigate potential losses, making these investments more secure and allowing for attractive yields without compromising credit quality.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. Specific investments described herein do not represent all investment decisions made by the manager. The reader should not assume that investment decisions identified and discussed were or will be profitable. Specific investment advice references provided herein are for illustrative purposes only and are not necessarily representative of investments that will be made in the future. No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Investors could lose some or all of their investments.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.
The foregoing views contains forward-looking statements relating to the objectives, opportunities, and the future performance of the markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.