Agency mortgage-backed securities (MBS) finished 2024 with a positive excess returns, but underperformed other U.S. spread products. We are entering 2025 with a constructive lean on agency mortgages.
We think positive performance will mainly be driven by further tightening in nominal spreads. We like to fade the elevated interest rate volatilities following the Trump inauguration, as the rates market has priced in a high deficit path, strong economic growth and higher for longer inflation expectation.
Agency MBS may benefit from any disappointments in economic data given the crowded positioning and tight valuation in credit products. We expect basis volatility to continue into 2025, and believe that active management will continue to be the key for generating meaningful excess returns.
Watch Sydney Xu, CAIA, Agency MBS Portfolio Manager to find out what’s in store for 2025.
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