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Blog > Posts > The Long-Term Performance of Mortgage-Backed Securities
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7/18/2012
In my opinion, one of the most interesting aspects of the bond market is that many investors don’t know how some asset classes (such as investment-grade or high-yield corporate bonds) have done compared with Treasury bonds. I’ve found that a good number of investors and most practitioners are well aware of what the long-term performance of stocks have been relative to short-term Treasury bonds, but in most cases they substantially overestimate bond returns compared with Treasury bonds.
In the past, I’ve outlined this long-term return data for corporate bonds, but this post focuses on mortgage-backed securities. Agency mortgage-backed securities have very little default risk, but they do have principal and interest payments that are unlike most other securities: All the payments are a combination of interest and principal repayment.
Further, these payments are fairly sensitive to interest rates. When interest rates fall — all else equal — more homeowners tend to refinance their mortgage, which means an increase in principal repayments. The exact opposite tends to be true when interest rates rise. So, in effect the maturity of mortgage-backed securities is unknown and dependent upon interest rate movements among various other factors. Nevertheless, this additional interest rate sensitivity should command a return premium.
Barclays Capital has been calculating the additional return agency mortgage-backed securities have earned relative to Treasuries since August 1988. Over the period August 1988–June 2012, this additional return premium has been about 0.35 percent per year, which I would argue is a much more modest premium than most investors would guess and of course doesn’t account for any costs. In fact, most CDs currently have a higher expected return relative to Treasury bonds than the 0.35 percent per year that agency mortgage-backed securities have historically earned.
Random Links and Commentary of the Week
Here’s a good piece from The New Yorker by Dexter Filkins pondering the future of Afghanistan after most of the U.S. military leaves. If you haven’t read Filkins book "The Forever War" and you enjoy this type of stuff, check it out.
A couple of good, relatively new tunes for you:
- Walkmen "Heaven" — If you don’t like this tune, let’s talk. I must know why.
- Beach House "The Hours" — Ben Lanning and I saw Beach House here in St. Louis and they were great.
- Wild Nothing "Shadow"
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 | Jared Kizer
Director of
Investment Strategy
BAM Advisor Services
(see bio)
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