Download Compared to U.S. Treasury investors, should U.S. Agency MBS

February 2017
Compared to U.S. Treasury investors, should U.S. Agency MBS investors be worried about their
portfolios in a rising rate environment?
By John Sprow
The short answer is no. U.S. Mortgages generally outperform
similar risk U.S. Treasuries across a variety of rate scenarios over
longer periods of time. To demonstrate this we parsed over 30
years of Bloomberg Barclays U.S. Aggregate return data into
periods of positive and negative returns to analyze the relative
performance. The general return advantage of U.S. Agency
Mortgages is clear and is shown below.
Compound Twelve Month Return
14%
12.04%
10.98%
12%
10%
8%
6%
Date
Percentage
Event
10/31/2008
-1.93%
Global Financial Crisis
5/30/2003
-1.47%
Iraq war
2/29/2008
-1.31%
Global Financial Crisis
9/30/2002
-1.21%
U.S. Stock market crash/Corporate
fraud
9/30/1998
-1.21%
Russia Default/Long term Capital
meltdown
4/30/2008
1.76%
Global Financial Crisis
1/30/2009
1.66%
Global Financial Crisis
4/30/2009
1.39%
Global Financial Crisis
1/29/1988
1.28%
Early mortgage market volatility
6/30/1988
1.22%
Early mortgage market volatility
Negative
6.33%
5.45%
4%
2%
It is helpful to understand relative performance outliers. The
largest monthly excess relative performance “outliers” from the
30 years of data are shown below:
1.07%
0.88%
0.54%
0%
-2%
-4%
-6%
-5.66% -5.12%
-8%
Full range (1/1987 12/2016)
Bloomberg Barclays U.S. Bloomberg Barclays U.S.
Aggregate Index Up
Aggregate Index Down
months
months
Positive
Interestingly, half of the large excess relative returns (positive and
negative) were observed during the 2008-2009 global financial
Sources: Amundi SB calculations, based on data from Bloomberg Indices.
crisis. Although U.S. Agency Mortgages suffered no credit or
liquidity issues, all spread assets dramatically underperformed U.S.
However, excess returns are not free. This performance advantage Treasuries due to the massive flight to quality into U.S. Treasury
is not certain and does vary especially over short periods of time. securities. The other specific events are characterized by less
dramatic but similar market moving events in the financial
There are a few reasons for these divergences. In the United
markets.
States, a mortgage borrower can refinance into a new loan
(without penalty) if mortgage rates fall. This is similar to many
In summary the data support our a priori expectation (and
corporate bonds. In addition U.S. Agency Mortgages have spread experience) that U.S. Agency Mortgages generally outperform
risk versus U.S. Treasuries, as they are not the same instrument
comparable duration Treasuries except in large or unexpected
and relative performance will diverge in certain scenarios. For
rate moves or flight to quality events. We are happy to discuss this
both of these reasons relative performance can vary.
further.
Bloomberg Barclays Treasury
Bloomberg Barclays MBS
Difference
John Sprow is an Executive Vice President and Senior Investment Specialist at Amundi Smith Breeden. Mr. Sprow is a 30 year
investment professional and draws on his deep investment experience to help clients develop investment solutions. During his
career Mr. Sprow has served as the Chief Risk Officer, co-head of the Investment Management Group, Senior Portfolio Manager,
and leader of the firm’s credit department. Mr. Sprow has been the lead portfolio manager for nearly all of the investment
strategies offered by Amundi Smith Breeden. He joined the firm in 1987.
Contributions from Yue Teng, Paul Younes, Kevin Monds, and Greg Brown.
For more information on this topic or to inquire about working with Amundi Smith Breeden, please contact us at 919.967.7221 or email
[email protected]. This is our current assessment of the market and is subject to change. All information is provided for informational purposes only
and should not be considered a recommendation to buy or sell securities. Past results are not necessarily indicative of future performance. This information is taken, in
part, from sources that we believe to be reliable, but no warranty is made as to accuracy. No part of this presentation may be reproduced in any form, or referred to in
any other written materials, without the written permission of Amundi Smith Breeden LLC.