Boston - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by volatile investor sentiment, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. The following are excerpts from a recent conversation with Andrew Szczurowski, CFA, Portfolio Manager at Eaton Vance Management.
What we are seeing: Over the course of the last week, the Federal Reserve has continued its substantial asset purchase plan, buying roughly $40 billion in agency mortgage-backed securities (MBS) per day. Having such a large, active purchaser like the Fed back in the market has helped boost prices and add more liquidity to the sector, which has made agency MBS one of the few bright spots in the broader fixed-income markets. Spreads on agency MBS are still very wide relative to long-term averages, but they have begun to tighten slightly — especially in generic MBS, where the Fed has been the major buyer of these fast-prepaying bonds. As "unlimited QE" continues, we expect spreads on all agency MBS will tighten, specifically the slower-prepaying securities on which our team tends to focus.
What we are doing: Our goal is to deliver conservatively positioned portfolios that still offer investors a more attractive yield than short-term Treasurys. The team continues to perform extensive due diligence and thorough collateral analysis on each bond we purchase, focusing on loan-level characteristics such as mortgage servicer, loan size and geography. Our preference is for securities that are likely to experience slower prepayments than the broader MBS universe. In addition, with agency MBS spreads currently wider than long-term averages, we have been focusing on bonds priced at or around par, which still offer attractive yields.
What we are watching: As volatility persists in the fixed-income markets, the differences between agency MBS and nonagency MBS are becoming especially glaring. In fact, The Wall Street Journal on April 1 published an article titled, "In the Coronavirus Economy, the Only Safe Mortgage is a Government-Backed One." Agency MBS carry a triple A rating, and are either explicitly or implicitly guaranteed by the US government; nonagency MBS, on the other hand, do not carry such guarantees and expose investors to varying degrees of credit risk. In addition, the agency MBS market is extremely large and liquid, averaging more than $300 billion in securities traded every day. This compares to the nonagency market where only $3.1 billion is traded on average per day, according to SIFMA as of February 29. Because of their higher quality and far greater liquidity, agency MBS have performed relatively well this year, while many nonagency MBS have seen their prices plummet.
Bottom line: In an environment of heightened concerns on both liquidity and credit fronts, agency MBS continue to appear very attractive for their AAA-rating and highly liquid market. Investors looking for a high-quality parking place to sit out these volatile markets may want to revisit agency MBS, which have tended to perform well when risk markets sell off, like in 2008 when this was one of the best performing sectors during the global financial crisis.