Agency Mortgage-Backed Securities (MBS) Market

Agency MBS Posted Strong Returns in Cinematic January    
In a January filled with market-moving headlines, agency MBS outperformed thanks to the one headline focused on the asset class. Broadly, risk assets weathered the economic and geopolitical events with relative stability. The US captured Venezuelan President Nicolás Maduro, the US deployed a naval fleet toward Iran in response to civilian protests, gold and silver hit all-time highs before retreating, oil rallied 14%, President Trump tried to acquire Greenland and temporarily proposed 10% tariffs on Europe for resisting, corporations rushed to issue new debt into spreads at multi-decade tights, the Department of Justice announced an investigation into Fed Chair Jerome Powell, and Trump proceeded to nominate Kevin Warsh to be the next Fed Chair, quelling some fears about the loss of Fed independence.

Through all this tumult, the main driver of agency MBS performance was the White House’s direction for Fannie Mae and Freddie Mac to purchase $200 billion in agency MBS, which we describe in detail below. The Bloomberg US MBS Index gained 0.41% on the month, reflecting a +0.52% excess return to Treasuries. Sector option-adjusted spread (OAS) tightened by 6bp to +16bp, with outperformance spread across coupons below par. Nominal spreads tightened by about 10bp on the month, as expected volatility fell. Ginnie Mae MBS outperformed conventional MBS, while 15-year mortgages did not participate in the rally.

GSE Directed to Buy $200 billion MBS
On January 8th, President Trump announced that he was instructing his representatives to buy $200 billion in mortgage bonds. Federal Housing Finance Agency (FHFA) Director Bill Pulte confirmed that he would direct the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, to execute those purchases. Fannie and Freddie had already grown their retained portfolios by about $50 billion over the second half of 2025, so these purchases would grow the portfolios toward the caps set by their preferred stock purchase agreement provisions. Those limits can be adjusted by White House and FHFA decree, but later in the month, Bill Pulte indicated that the program would not be expanded. Of course, plans are subject to change.

Details remain scant on the purchase program. Neither the FHFA nor the GSEs have indicated the speed at which the purchases will be executed, what coupons they will buy, whether valuation metrics will determine the composition or timing of buying, etc. However, as the stated goal is to lower the mortgage rate, investors have assumed that purchases will be focused in coupons slightly below par. The Bloomberg US MBS Index tightened 8bp the day of the announcement and ended the month 6bp tighter, though most of that tightening was focused in the middle of the coupon stack, reducing mortgage rates by 14bp the day of the announcement. Higher coupon underperformance was further exacerbated over fears that guarantee fees and mortgage insurance premiums could be cut to lower mortgage rates. 

With the White House’s focus shifted to housing affordability, promises to reprivatize Fannie Mae and Freddie Mac are unlikely to materialize in 2026. While we believe purchases will be somewhat attuned to relative value, investors are unlikely to be willing to participate in an IPO of companies whose balance sheet management must follow government direction with potentially non-economic priorities.

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Outlook: A Range-Bound 2026, Until the Next Headline 
On the heels of a strong December to cap an impressive 2025, agency MBS continued to tighten in January thanks to announced demand from Fannie Mae and Freddie Mac.  As we have repeated over the past few months, it is even harder now to find spreads compelling on a standalone basis relative to Treasuries, and we have been content to reduce overweights and take profits on recent outperformance. However, we believe recent announcements are properly reflected in the price, and potential MBS demand at current spreads canbalance marginal selling if the market tightens further. As a result, we are motivated to maintain a benchmark weight relative to Treasuries or a mild overweight versus interest rate swaps. 

The arguments against MBS at this point are emphatic and first-order. Offsetting positive factors are more nuanced, yet can provide support to the asset class at these levels: 

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The balanced table above suggests a neutral allocation to most benchmarks is prudent to us at this time, though we are more bullish on agency MBS as a positive contributor to an aggregate, multi-sector, or multi-asset portfolio, and we are more constructive on MBS relative to swaps than to Treasuries. Our strongest conviction lies in specified pools with characteristics we find underappreciated by the market, particularly for higher coupons with the most model risk premium, as well as in lower coupon interest-only strips. Spread compression reduces relative value overall, but we are optimistic that prepayment uncertainty and headline-induced dislocations can provide adynamic allocation and security selection opportunities.

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