Podcast Summary: Thoughts on the Market
Episode: Are Agency Mortgage-Backed Securities Making a Comeback?
Date: September 2, 2025
Hosts: Jay Bacow & Jim Egan, Co-Heads of Securitized Products Research, Morgan Stanley
Episode Overview
In this episode, Jay Bacow and Jim Egan explore the current value opportunities in agency mortgage-backed securities (MBS), particularly considering the post-Jackson Hole environment. The hosts examine why mortgages are looking attractive relative to other high-quality assets, the impact of shifting Federal Reserve policy, and the evolving dynamics of supply and demand in the agency mortgage market.
Key Discussion Points & Insights
1. The Policy Backdrop: Post-Jackson Hole Clarity
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Fed Policy Outlook:
- The Federal Reserve is now seen as likely to cut rates in a “steady, almost programmatic fashion,” reducing uncertainty in the markets.
- [00:22] Jim Egan: “After Jackson Hole, the Fed seems like it's leaning towards cutting rates in a steady, almost programmatic fashion.”
- The Federal Reserve is now seen as likely to cut rates in a “steady, almost programmatic fashion,” reducing uncertainty in the markets.
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Impact on Agency Mortgages:
- The possibility of the Fed staying “on hold” had been a significant risk, but with that receding, the environment feels more supportive for agency MBS investors.
"One of the worst-case scenarios for agency mortgages... would have been the Fed staying on hold for much longer than expected. With that risk receding, the backdrop for investors owning agency mortgages feels a lot more supportive."
— Jay Bacow [00:40]
2. Mortgages vs. Corporate Credit: Where’s the Value?
- Relative Valuation:
- Corporate credit spreads are trading at their tightest levels in 20 years, while mortgages are at their 20-year average, offering relatively “cheap” yields for high-quality assets.
“Mortgages are basically at the average level of the past 20 years. Seems attractive to us.”
— Jay Bacow [00:40]
- Risk & Yield Balance:
- Agency MBS, with their government guarantee, give investors a way to earn yield while minimizing credit risk.
“Investors are looking for places to earn yield without taking on too much credit risk. Mortgages, particularly agency mortgages with government guarantee there, they offer that balance, right?”
— Jim Egan [01:26]
3. Shifting Demand: The Role of Fed, Banks, and REITs
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Previous Buyer Composition:
- The biggest MBS holders (Fed and U.S. banks) have recently been net sellers or on the sidelines, leaving money managers and overseas investors as key buyers.
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Potential Shifts Ahead:
- As the Fed signals rate cuts and market uncertainty falls, banks and possibly REITs may be incentivized to increase allocations to mortgages. Timing hinges on regulatory developments.
“With more clarity on Fed policy, banks in particular may get more comfortable adding mortgages to their balance sheets, though the exact timing depends on regulatory developments. REITs might also find this more compelling.”
— Jim Egan [02:15]
- Supply Side Dynamics:
- Net issuance of conventional mortgages has been negative, a positive technical for the market. Other technicals, such as mortgage roll pricing, are improving.
4. The Role of Rate Volatility
- Volatility as a Risk Factor:
- Owning mortgages means being “short” interest rate volatility. Reductions in volatility since last year are supportive for MBS.
"If you're buying mortgages, you're inherently short rate volatility. And volatility has come down meaningfully since last year, even if it's still above pre-Covid norms. Lower volatility supported for mortgage valuations..."
— Jim Egan [02:50]
- Valuation Nuance:
- Mortgages are not “cheap” per se, but valuations are attractive relative to other spread products, especially in the context of historically high equity prices and tight credit spreads.
"It's not about a snap tighter in spread. It's more about getting paid carry in an environment where spreads can grind in over time."
— Jay Bacow [03:56]
5. Risks & Timing
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Potential Risks:
- If credit spreads widen, mortgages would not be immune.
- Regulatory uncertainty (e.g., Basel III proposals) may delay bank re-engagement.
- Prepayment risk remains if rates fall unexpectedly.
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Outlook:
- Agency MBS are likely to do well due to improving demand, supportive technical factors, and better clarity on Fed policy.
Notable Quotes & Memorable Moments
- On Relative Value:
“When we look at high quality assets, we think mortgages look like the cheapest option.”
— Jay Bacow [00:40]
- On Fed’s Effect:
“The Fed's cutting rates, as we said, should incentivize investors to move out of cash and into securities.”
— Jay Bacow [03:13]
- On the Investment Thesis:
“Summing it up, mortgages look wide to alternative asset classes. The demand picture we think is going to improve and more clarity around the Fed's path is going to be supportive as well. All of that we think makes us feel confident this is an environment that mortgages should do well.”
— Jay Bacow [03:56]
Timestamps for Important Segments
| Timestamp | Segment | |-----------|----------------------------------------------------------------| | 00:22 | Impact of Jackson Hole on Fed policy and market uncertainty | | 00:40 | Mortgages' relative value vs. other asset classes | | 01:26 | Mortgages as a balance of risk and yield | | 01:41 | Shifts in mortgage buyers and the supply-demand picture | | 02:15 | How bank and REIT demand could change | | 02:50 | Importance of interest rate volatility | | 03:13 | Valuations, risks, and the case for mortgages | | 03:44 | Risks, timing, and outlook summary |
Tone & Style
The conversation is matter-of-fact yet optimistic, emphasizing analytical rigor with an eye on practical investment implications. Bacow and Egan maintain the clear, accessible language typical of Thoughts on the Market, focusing on giving actionable, insightful perspectives.
Summary
Are agency mortgage-backed securities due for a comeback? Bacow and Egan argue yes, pointing to more favorable Fed policy, improving demand dynamics, and attractive relative valuations. The environment is shifting from uncertainty to opportunity for agency MBS—though investors should stay mindful of timing, regulatory developments, and residual risks. Key takeaway: agency mortgages offer the rare blend of yield and safety in a market where other spread products look expensive, making them a compelling option as the cycle evolves.
