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, Eaton Vance Management.
What we are seeing: As we expected, the US Federal Reserve (Fed) — the largest single holder of agency mortgage-backed securities (MBS) — has reemerged to help maintain a liquid and orderly mortgage market. On March 15, the Fed announced a new round of quantitative easing, committing to purchase at least $500 billion in US Treasurys and $200 billion in agency MBS. This represented a sharp turnaround from the Fed's previous policy of allowing roughly $20 billion of agency MBS to roll off its balance sheet each month — going from releasing $240 billion of supply into the market over the next year to buying at least $200 billion during the next few months. The Fed then made a number of additional announcements on March 23 to stabilize markets, including an extension to unlimited purchases of Treasurys and agency MBS.
The agency MBS market had been dealing with elevated levels of supply for the past several quarters, so the Fed's announcements were welcome news. Having a large, price-insensitive buyer like the Fed may help tighten spreads over US Treasurys, which have reached their widest levels since 2013.
What we are doing: In seeking to maintain a conservatively positioned portfolio that still offers investors a more attractive yield than short-term Treasurys, the team continues to be very selective in this environment, focusing on 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: With consumers across the US sheltering in place, while many bank employees work from home, new home sales and mortgage refinancing activity are likely to decline dramatically, resulting in a substantial decrease in agency MBS supply in the coming months. A secondary tailwind could be a slowdown in mortgage prepayments, as bank refinance operations may be less efficient and home purchase and refinance closings are delayed, as quarantines impact bank employees, lawyers and courthouses. If so, the Fed's purchases may amount to an even larger share of the market, which would be even more supportive of agency MBS spreads.
Bottom line: In an environment of heightened concerns on both liquidity and credit fronts, agency MBS appear increasingly 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 tend 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.