Investors are selling mortgage bond funds at the fastest clip in more than six years as the debt takes a hit from big jumps in yields. Exchange-traded funds that own US mortgage-backed securities notched $2.4 billion of net outflows in September, the most since March 2020.
The selling comes after Treasury yields soared to multi-decade highs on expectations that the Federal Reserve will raise interest rates to fight inflation. Mortgage-backed securities tend to perform poorly when bond yields surge or drop unexpectedly. In rising interest rate environments, homeowners are less likely to refinance and investors are locked into lower-yielding mortgage securities.
“Rate volatility in general isn’t good for any debt but it’s particularly bad for MBS because of that prepayment behavior,” said James Seyffart, ETF analyst at Bloomberg Intelligence. “Throw in the fact that you can now get 5%+ nominal yield from Treasuries without the complexity of MBS and the tradeoff might become a more difficult argument to make.”
BlackRock’s iShares MBS ETF, known as MBB, has seen about $2.7 billion of outflows in September, the most in any month since its inception. Investors also fled the Simplify MBS ETF and the Schwab Mortgage-Backed Securities ETF, which registered $342 million and $245.8 million in outflows, respectively. BlackRock sold over $1 billion of MBB and shifted into an actively-managed MBS ETF.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing