{"id":1786,"date":"2025-09-28T10:53:41","date_gmt":"2025-09-28T10:53:41","guid":{"rendered":"https:\/\/igorsplayground.com\/appcheckr\/rate-relief-mortgage-spread-compression\/"},"modified":"2025-09-28T10:53:41","modified_gmt":"2025-09-28T10:53:41","slug":"rate-relief-mortgage-spread-compression","status":"publish","type":"post","link":"https:\/\/igorsplayground.com\/appcheckr\/rate-relief-mortgage-spread-compression\/","title":{"rendered":"Rate Relief & Mortgage Spread Compression"},"content":{"rendered":"

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As anticipated, the Federal Reserve cut interest rates during its September FOMC meeting, reducing the funds target range by 25 basis points to 4.00% to 4.25%. This decision marked a shift after maintaining rates since December, reflecting recent weakness in labor markets<\/a>. Concerns about a potential growth slowdown have emerged, even as inflation remains above the Fed’s target. The Committee’s updated projections indicate further rate cuts through 2025, with a gradual decline expected until 2027. In his remarks, Fed Chair Powell described this move as a step toward neutrality, acknowledging a shift in the balance of risks from inflation to employment. This transition highlights the ongoing strength in the MBS market, reinforcing themes we\u2019ve been tracking<\/a> and suggesting potential for further relative outperformance.<\/p>\n

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Agency mortgage-backed securities (MBS) are bonds backed by the cash flows of residential mortgages, typically issued through government-sponsored entities like Fannie Mae and Freddie Mac. These securities carry minimal credit risk due to implicit government backing but are subject to interest rate risk, which can affect prepayment speeds and cash flow timing.<\/p>\n

One critical measure of MBS relative value is the \u201cmortgage basis,\u201d which represents the spread between agency MBS and comparable Treasuries. This spread compensates investors for prepayment and sector risks, often widening during periods of increased volatility. After reaching multi-year highs in 2022, the basis has steadily retraced and is now nearing the narrow levels last observed in 2023. This shift comes as labor market weakness has emerged as a significant concern for the economy, placing the basis on the verge of breaking below levels seen after the Fed’s rate hike.<\/p>\n

\"Agency<\/p>\n

Source: Sage, Bloomberg<\/p>\n

Currently, the current-coupon MBS basis stands at nearly 120 basis points over Treasuries, offering significant value. Investors can achieve a greater yield from AAA-rated MBS compared to many lower-rated corporate bonds that carry credit risk. This dynamic emphasizes how the sector continues to compensate investors for rate and prepayment uncertainties, even as spreads compress.<\/p>\n

When interest rates decline, the duration of agency MBS shortens as borrowers are more likely to refinance early, leading to accelerated principal repayments and reduced sensitivity to future rate changes. This creates a duration gap for benchmarked investors, prompting many to shift into longer-duration assets like Treasuries to maintain alignment. Concurrently, the need to hedge against convexity risk diminishes, resulting in fewer Treasury sales for hedging purposes. These shifts in positioning and hedging can add momentum to the rate rally, supporting lower yields and reinforcing the relative strength of MBS.<\/p>\n

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Source: Sage, Bloomberg<\/p>\n

Looking ahead, the environment for MBS continues to improve. The Fed’s pivot toward easing is expected to lower rate volatility, addressing one of the sector’s most significant challenges. Banks, traditionally the largest buyers of mortgages, are on stronger footing and may re-enter the market as demand returns. Additionally, the contraction in MBS duration and the resulting hedging dynamics are already reinforcing the rally in Treasuries, creating a virtuous cycle that supports valuations. Adding to this is the political wildcard: the administration’s focus on reducing long-term yields and mortgage rates. With policymakers ultimately shaping the landscape, this \u201cunknown unknown\u201d presents another tailwind, positioning agency MBS favorably for the next stage of the cycle.<\/p>\n

Originally published<\/a> September 22, 2025<\/em><\/p>\n

For more news, information, and strategy, visit the ETF Strategist Content Hub<\/strong><\/a>.<\/em><\/p>\n\n

Disclosures: <\/em><\/span><\/h2>\n

This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy, or investment product. Although the statements of fact, information, charts, analysis, and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy. The underlying information, data, figures, and publicly available information have not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis, and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage\u2019s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.<\/em><\/span><\/p>\n

Sage Advisory Services Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high-net-worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.<\/em><\/span><\/p>\n

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Earn free CE credits<\/strong> and discover new strategies<\/h2>\n<\/p>\n<\/section>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

As anticipated, the Federal Reserve cut interest rates during its September FOMC meeting, reducing the funds target range by 25 basis points to 4.00% to 4.25%. This decision marked a shift after maintaining rates since December, reflecting recent weakness in labor markets. Concerns about a potential growth slowdown have emerged, even as inflation remains above […]<\/p>\n","protected":false},"author":1,"featured_media":1787,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[60],"tags":[],"class_list":["post-1786","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-etfs"],"_links":{"self":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts\/1786","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/comments?post=1786"}],"version-history":[{"count":0,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/posts\/1786\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/media\/1787"}],"wp:attachment":[{"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/media?parent=1786"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/categories?post=1786"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/igorsplayground.com\/appcheckr\/wp-json\/wp\/v2\/tags?post=1786"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}