Hacked off with soaring housing costs and stubborn mortgage rates? Disgusted by skimpy supply and the fierce bidding wars which can be now required to seek out a good place to live?
When you’re searching for revenge, buy mortgage-backed securities.
No, investing in these lesser-known financial instruments won’t directly cut high housing costs. But it’s going to position you to realize from a housing opportunity that has remained hidden by bond pundits’ persistent fixation on the Federal Reserve.
Investing in mortgage-backed securities will position you to realize from a housing opportunity that has remained hidden by bond pundits’ persistent fixation on the Federal Reserve. REUTERS
I write totally on stocks, but a bargain is a bargain. When you’re taking retirement money flow or simply crave lower volatility, mixing bonds with stocks may help.
And, yes, you could possibly buy Treasurys – longer-term maturities if rates are falling, shorter-term in case you think rates will rise. Or corporate bonds for higher yields and ties to economic growth. Or high-yield corporates (aka “junk” bonds) for infrequent stock-like returns.
But to essentially impress family and friends, explore mortgage-backed securities. MBSs suffer a bum rap from low-quality versions that played a starring role in 2008’s financial crisis. But this isn’t that. Fairly, meet MBSs backed by Fannie Mae and Freddie Mac. After the 2008-era rescue, these bonds have US government backing. Treasury-like quality! So, where is the chance?
Often, agency MBSs act like Treasurys’ sad cousins. As Treasury bond prices rise, similar maturity agency MBSs’ prices often rise less. When Treasurys fall, MBSs often fall more (in trading jargon, that’s called “negative convexity” – Google it for giggles).
Why? Because historically, people moved or refinanced, repaying their loans early.
Not now. All the pieces that frustrates you with today’s housing creates an agency-backed MBS sweet spot. Those aggravating 7% mortgage rates mean hardly anyone refinances. Why would they? Most householders enjoy older rates far below today’s. That is great for MBSs: It means less refinancing push and pull on MBSs yields.
Mortgage rates are historically quite high relative to Treasury yields. That won’t last.
Bond prices and yields move inversely. When long rates fall, existing, higher-rate bonds look more attractive, so their prices rise more. While Fed cut talk now abounds, those are about short-term rates. The free market sets long rates. Markets pre-price all widely discussed topics. Long-term Treasury yields shouldn’t fall much from Fed cuts because they’re already expected.
Mortgage rates are historically quite high relative to Treasury yields. That won’t last. Mortgage rates’ joyful place is closer to 20- or 30-year Treasury yields. But easy volatility pushed them higher currently. As that reverses and long rates fall somewhat – and bond prices rise – agency MBS prices should rise much more, boosting your total returns.
The best way to implement this? Easy: ETFs.
VMBS and SPMB are two of several tickers fitting the agency MBS bill well. You may trade these in a flash with minimal (or no) cost.
Tempted to do it yourself via individual bonds? Don’t. Bond markups and embedded trading costs will be astronomical for retail investors. Individual MBSs aren’t easy to purchase and sell in small doses. Liquidity can worsen as they age and more of the underlying mortgages’ principal is repaid. You would find yourself with positions too small to sell.
Properly managing agency MBSs directly requires frequent rebalancing to reinvest the returned principal. More trading costs and bad pricing! Brokers would eat an excessive amount of of your returns.
The ETFs solve all that, buying and selling like institutions do, providing you access to higher pricing and much lower trading costs. Check prospectuses, naturally. But these generally keep fees super low – more return for you. In addition they keep you diversified and with a spread of maturities. You won’t be overexposed to long or short durations (which might concentrate risks and overlook opportunities). You’ll get balance.
So, yes – high mortgage rates frustrate would-be homeowners. However the angst hides opportunity for you.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time Latest York Times bestselling writer, and regular columnist in 21 countries globally.
