Fixed Income - Wells Fargo Corporate & Investment Banking

The securities in the index are backed by a large pool of mortgages, and the payments made by the borrowers of these mortgages are passed along to investors. This strategy has minimal credit risk, as its holdings are rated AAA. However, the fund contains debt securitized by Fannie Mae, Ginnie Mae, and Freddie Mac, and only bonds issued by Ginnie Mae are backed by the full faith and credit of the U. Mortgage Backed Securities Index, the option-adjusted yield premium for agency MBS averaged approximately 40 basis points during the trailing 10 years through July While this is less than what was offered prior to the financial crisis, agency MBS still provide a few key benefits.

On top of the additional yield relative to Treasuries, they contain much less credit risk relative to investment-grade corporate bonds, and they are driven by a different risk exposure which means they provide diversity. Prepayment risk is the source of the yield premium, and it arises because of the tendency of mortgagors to refinance when interest rates fall. Consequently, they have negative convexity. The strategy should perform well relative to its intermediate government bond Morningstar Category peers during periods when credit risk is rewarded, or when interest rates rise, as prepayments are less likely in those periods.

People An experienced, well-equipped team manages all of Vanguard's fixed-income index strategies, underpinning the Above Average Pillar rating. Portfolio management at Vanguard is a team effort, so key-person risk is not a concern. Barrickman leads a team of sector specialists, including a manager focused on government bonds, along with an exchange-traded fund team, which helps with ETF basket creation.

These managers are also supported by a team of traders who focus on execution, as well as a data team, which checks incoming index data and helps the managers prepare for upcoming index changes. These teams free up time for the managers to focus on portfolio construction and index tracking. Process This broad, market-value-weighted portfolio accurately reflects the composition of the U. MBS market, harnessing the market's collective wisdom. It also mitigates transaction costs by keeping turnover low and tilting toward the largest bond issues, which tend to be the cheapest to trade.

Why Invest in Mortgage-Backed Securities (MBS)?

The strategy earns an Above Average Process Pillar rating. The fund employs representative sampling to track the Bloomberg Barclays U. Read More. Investment Options. Filter By. View All Funds. Knowledge Shared. Explore our insights. Blog News Feed.

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INVESTMENT OUTLOOK 2021

Learn more. December Global Perspectives Investment Outlooks. Fixed Income Portfolio Manager. Key Takeaways Looking ahead to , we think the lessons of should be kept firmly in mind: Treasuries can be useful as a hedge in times of uncertainty, core allocations to spread products like corporate bonds still make sense and active management is paramount. Corporate bonds — whether investment grade or high yield — and securitized markets like mortgage- or asset-backed securities still offer an attractive yield premium over U.

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