Agency Mortgage-Backed Securities (MBS) Market - July 2026

Tyler Patla - Managing Director, Deputy Director of Core Fixed Income, Director of Agency Mortgages, Portfolio Manager

Agency MBS Suffered in July’s Eventful Selloff

July continued providing market-moving, yet unthematic, headlines that drove oscillation in spread markets. Mid-June’s tenuous ceasefire between the US and Iran eroded, reigniting the conflict in early July, spiking oil prices and renewing inflationary fears. Investor confidence in the artificial intelligence capital expenditures wavered, as did confidence that soaring chip-maker profits would continue. Late in the month, long-term Treasury yields extended their move higher following Fed Chair Warsh's second post-FOMC press conference. Several ambiguous remarks during the press conference steepened the yield curve and increased inflation expectations. To close the month, the US Treasury intervened directly in global currency markets, acting in coordination with Japanese authorities to slow the falling yen. Despite this tumult, US economic data offered reassurance, with indications of solid underlying growth and cooling monthly inflation, bolstered by robust Q2 corporate earnings.

Amidst this eventful backdrop, agency MBS oscillated, but finished the final few days of July on a down note, continuing its tendency to trade to longer durations than model predictions in a selloff. The Bloomberg US MBS Index returned -1.42% on the month, reflecting a -0.44% excess return to Treasuries as sector option-adjusted spread (OAS) widened by 7bp to +31bp. Interestingly, this came amidst a steepening yield curve, an unlikely response given historical precedent, as we will investigate in the next section. Underperformance was relatively even between lower and higher coupons, and MBS significantly lagged corporate bonds, with the Bloomberg US Corporate Index and Bloomberg US High Yield Index only lagging Treasuries by 0.26% and 0.08%, respectively.

MBS Stays “Ahead of the Curve”

Mortgage option-adjusted spread, by definition, attempts to estimate value after controlling for expected volatility and interest rates, including the shape of the yield curve. As a result, one would not expect mortgage OAS to have a tendency to widen or tighten in specific yield curve combinations. In the following table, we have categorized every month of the past 15 years into one of four buckets, depending on whether the slope between the 2-year Treasury yield and 10-year Treasury yield steepened or flattened, and whether interest rates predominantly fell or rose. We then calculate the mean change in the OAS of current coupon mortgages in those environments. OAS has tended to widen:

• during months of bull flattening, which sometimes indicate economic or financial distress and a flight-to-quality,
• or in months of bear steepening, when higher projected Fed Funds rates:
• decrease projected net interest margins of investing deposits in MBS, discouraging bank demand
• increase projected currency hedging costs, discouraging overseas demand

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Source: Bloomberg, Pioneer Investments, as of July 31, 2026
 

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Source: Bloomberg, Pioneer Investments, as of July 31, 2026
 

Conversely, MBS outperformed in the other two rate environments. Investors have tried to stay “ahead of the curve” by not just looking at immediate carry/yield profiles of MBS, but projecting forward.

So why did agency MBS widen in July despite a bear-steepening yield curve? Because the MBS carry profile for these investors, while currently strong, is no longer projected to improve as it had been for much of the past two years. In the graphas to the right and on the following page, we illustrate the concepts introduced above – current and 6-month-forward projected carry profiles for domestic banks (right) and currency-hedged investors (next page). This curve move has been the predominant factor in tempering our positivity for an asset class that started the year with constructive outlooks in these facets, alongside bank regulatory clarity and the most benign net issuance profile in over a decade.

Outlook: Technicals Stuck in Neutral

Consistent with prior months, we still believe agency MBS spreads will remain range-bound, with movement within the range influenced by exogenous headlines and short-term dynamics. In July, agency MBS spreads continued to move with high correlation to broader risk sentiment, implied rate volatility, and Fed expectations, ending the month on the wider/weaker end. The passthrough to MBS spreads with implicit guardrails is a function of balanced valuations, technicals, and fundamentals, with the medium-term outlook for these dynamics shifting.
 

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Source: Bloomberg, Pioneer Investments, as of July 31, 2026
 

Valuations: Mortgage OAS to Treasuries is slightly tight to its 5-year and 10-year averages, which looks attractive when comparing current spreads on the Bloomberg US Corporate Index relative to its respective spread history. Mortgages have now lagged corporates YTD as some asset managers to reduce their overweight to MBS to participate in record levels of corporate bond issuance, particularly as the weight of MBS in fixed income indices has declined. Meanwhile, thanks to negative swap spreads, OAS to swaps is at 73bp, above its average over the past decade, and many potential marginal buyers of MBS tend to hedge with swaps.

Technicals: The updated Basel III Endgame proposal could inspire banks to make up for a lack of purchases in recent years. However, as described above, while current carry relative to interest on reserve balances (IORB) is at recent highs, a flatter yield curve generates forward curves, which project banks’ net interest margin on MBS to contract amid more hawkish Fed expectations. Similarly, while currency-hedged carry for overseas investors is relatively strong, it is not projected to rise more if forward expectations are realized. Fannie Mae and Freddie Mac added MBS aggressively in Q1 as directed by the Trump administration, but have curiously stopped growing their portfolios in the past few months, with no official communication whether we should expect purchases to resume to meet 2026 demand targets. Mortgage real estate investment trusts (mREITs) have traded above book value and are positioned with relatively low leverage, which may facilitate further MBS purchases.

Fundamentals: AI advancements and isolated prepayment data suggest more efficient refinancing the next time mortgage rates fall, with the potential for streamline refinancing in conventional loans that could meaningfully accelerate cheapest-to-deliver prepayments. However, current data continues to support more benign prepayment outlooks, with any spike in recent years short-lived and explainable by loan closing timeline adjustments. Prepayments have slowed significantly over the past quarter as media focus on mortgage rates has waned, suggesting many borrowers may be less reactive to a potential sustained drop in rates. With the recent selloff, the market sits even further from meaningful prepayment risk. If faster speeds do arise, such an environment also increases the potential for security selection opportunities, as do potential dislocations from changing government policies.

The balanced considerations above and price-sensitivity of marginal investors have influenced us to trade around in modest size as headlines moved markets. Broadly, the willingness of asset managers to sell at tighter spreads, with banks, overseas investors, mREITs, and agencies willing to buy at wider spreads, can provide both the resistance and support to maintain the range as macro factors oscillate. While net issuance of MBS is quite low, demand from banks, overseas investors, and the agencies could weaken or disappear in 2027, reducing (but not extinguishing) our optimism over a longer timeline. Dedicated MBS portfolios are positioned more closely to the index than the long-term average, but we view agency MBS more favorably as a positive contributor to aggregate, multi-sector, or multi-asset portfolios. We prefer MBS relative to swaps rather than to Treasuries, particularly because current marginal sources of demand hedge this way. Additionally, we are optimistic that prepayment uncertainty and headline-induced dislocations may provide dynamic allocation and security selection opportunities.

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Source: Bloomberg, as of July 31, 2026
1 Index Data: Bloomberg US MBS Index, Bloomberg GNMA Index, Bloomberg US Aggregate Corporate Average OAS, Bloomberg US Investment Grade ABS Index, Bloomberg US Investment Grade CMBS Index.
2 S&P/Experian First Mortgage Default Index, MBA Refinance Index.
3 The characteristics are of the representative account (gross, USD) in the US Agency MBS composite. Gross-of-fees returns are presented before management and custodial fees but after any transaction costs.

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Source: Pioneer Investments, as of July 31, 2026
Performance prior to April 1, 2025, occurred while the portfolio management team was affiliated with a prior firm. Such members of the portfolio management team were responsible for investment decisions at the prior firm and the decision-making process has remained intact.
Returns greater than one year are annualized. Returns are expressed in US dollars and reflect the reinvestment of dividends and other earnings.
Gross-of-fees returns are presented before management and custodial fees but after any transaction costs. The composite net-of-fees returns reflect net of model fees and are calculated in the same manner as gross of fee returns using the Time Weighted Rate of Return method. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size.
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