Agency Mortgage-Backed Securities (MBS) Market - October 2025

PREPARED BY: Tyler Patla - Senior Vice President, Deputy Director of Core Fixed Income, Director of Agency Mortgages Portfolio Manager

MBS Market Endured Hakwish Fed, Finished October Positively
The US government shutdown that spanned most of October created a relative data vacuum that forced investors to rely on alternative economic indicators. September’s inflation came in softer than anticipated, while labor and economic activity data painted a picture of steady, trend-like growth. Labor market signals from state unemployment insurance claims and ADP payroll data suggested labor market stabilization, though hiring activity remained subdued. Consumer spending data from credit and debit card transactions indicated continued overall strength, despite pockets of weakness. The month's defining moment came with the October 29 Federal Open Market Committee (FOMC) meeting, which delivered what markets interpreted as a hawkish interest rate cut. While the FOMC reduced the Fed Funds target rate by 0.25% as expected, Treasury yields rose 10 basis points across the curve following Chair Powell's emphasis on the uncertainty surrounding a December interest rate cut and dissent within the committee. He stated, "a further reduction in the policy rate at the December meeting is not a forgone conclusion. Far from it. Policy is not on a preset course." 

Consistent with its correlation with monetary policy expectations, the agency MBS market’s October outperformance was dampened by Powell’s testimony, widening spreads by 4bp from the local tights. The FOMC also announced, as widely expected, that it would end quantitative tightening on December 1, reinvesting effectively all agency MBS as well as Treasuries back into Treasuries. The performance headwind, however, came from the uncertainty in forward guidance, as the Fed has not purchased MBS since March 2022, and investors did not expect a different outcome in regards to the balance sheet.

Despite spread retracement, the MBS sector managed to post another solid month. The Bloomberg US MBS Index gained 0.86% on the month, reflecting a 0.26% excess return to Treasuries. Sector option-adjusted spread (OAS) tightened by 3bp to +28bp. Lower coupons performed best in October, as Fed hawkishness more weighed primarily on investors’ expectations of demand for current coupon. 

Fannie and Freddie Added MBS, Set Up for More?
In last month’s issue, we laid out our belief that among the avenues the federal government could take to generate demand for agency MBS in an effort lower mortgage rates, facilitating and encouraging Fannie Mae and Freddie Mac to grow their retained portfolios was the most likely. In October, we found additional data points in support of this theory. In October’s reports, Fannie Mae purchased $5.2 billion agency MBS in September, bringing its additions over the previous three months to $11.5 billion. Freddie Mac added $2.6 billion loans in September, generating $15.8 billion in additions over the prior three months. These purchases  bring the portfolios to their highest levels in multiple years ($99 billion for Fannie Mae, $116 billion for Freddie Mac), but leaves $235 billion in cumulative room below their respective $225 billion asset caps.

Freddie Mac was additionally under a cap of $20 billion in single-family MBS, which the Federal Housing Finance Agency (FHFA) doubled in October to $40 billion, allowing both agencies to potentially add a mix of securitized MBS and loans in the coming months. We continue to believe that the agencies will be opportunistic buyers, rather than programmatic buyers, providing a potential backstop for spreads rather than an impetus to drive them increasingly tighter. 

Outlook: Improving Technicals Reflected in Valuations 
In July’s commentary, we highlighted that our outlook for agency MBS was constructive, but dependent on macro factors and monetary policy. As these factors have broadly shifted dovishly over the past three months, agency MBS performance has excelled, both relative to Treasuries and other spread assets. While spreads are now close to the tights of the past couple of years, this move rationally reflects a change in technical and fundamental outlook. While we no longer find spreads compelling on a standalone basis and have been content to take profits on recent outperformance, a constructive outlook for demand from a wide range of investors motivates us to maintain a benchmark weight.

In MBS’s favor:

• An improving supply-demand dynamic: If the Federal Reserve continues its rate cuts, MBS will become an increasingly attractive asset class for some of its larger investor bases. Banks expect to get clarity on the Basel III Endgame soon, and the carry on MBS relative to interest on excess reserves (IOER) and other short-term alternatives has expanded as the Fed has lowered interest rates. Mortgage Real Estate Investment Trusts (mREITs) have been able to raise capital to fund purchases. Meanwhile, the currency hedging costs for overseas investors has decreased.
• Stronger relative value to investment-grade alternatives: Despite recent outperformance, agency MBS has remained historically attractive versus corporate bonds, which are significantly tighter than agency MBS when compared to their respective long-term averages by most metrics. As a result, we are more bullish on agency MBS beta as a positive contributor to an aggregate, multi-sector, or multi-asset portfolio than we are versus Treasury or cash benchmarks.
• Potential administrative action or regulatory change: As discussed above, multiple signs point to Fannie Mae and Freddie Mac becoming more active in managing their retained portfolios, supported by regulatory changes. Additionally, we cannot ignore the possibility of action from the Trump administration that introduces a large buyer in an indirect attempt to tighten the mortgage spreads and lower mortgage rates. We do not advocate owning the sector in anticipation of an uneconomic actor moving the market, but it is a risk worth considering for the asset class’s potential outcome distribution.

The argument against:

• Nominal spreads are relatively tight: Many metrics, like Bloomberg MBS Index OAS and current coupon nominal spread, put the asset class around the tightest it has been over the past 3 years. We believe a longer-term perspective, a comparison to alternative spread assets, and the improved technical outlook justify these valuations. However, it would be reasonable for investors to consider selling agency MBS in a risk-off scenario, particularly for investors whose alternative is US Treasuries and for asset managers sitting at historic overweights to the sector.
• Hearty demand is not guaranteed: Despite a constructive backdrop, aggregate agency MBS demand could still disappoint. Active allocators could opportunistically reduce, and we are also wary of continued de-dollarization from overseas investors in response to geopolitics, trade wars, threats to central bank independence, and public trust in federally published economic statistics.
• Potential increased prepayment risk a rally: Temporary spikes in refinanceability over the past couple of years have given some investors pause if extrapolated over a larger, sustained rally from a weakening economy. While our data analysis assuages some of our fears on this front, consolidation and innovation among several aggressive mortgage originators could yield increased technologically-driven operating efficiencies in the next refi wave. Such a trend could decrease sector performance, but increase the potential value of security selection.

Overall, while we continue to find agency MBS to be an attractive alternative to credit, we feel a neutral allocation to most benchmarks is prudent at this time. A more supportive technical dynamic has already moved MBS tighter, but the sector could struggle to find support in a reflation-induced, bear flattening curve environment. In the interim, our strongest conviction is 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 floating-rate collateralized mortgage obligations. We remain nimble to reduce on short-term outperformance and are willing to add more if spreads widen due to technical factors or exogenous event risk.

Securitized Market Dashboard

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Source: Bloomberg, as of October 31, 2025
²Index 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. 
³S&P/Experian First Mortgage Default Index, MBA Refinance Index. 
⁴The 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 October 31, 2025

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