With a background of low bond yields and muddling global growth, investors are looking for alternative ways to construct fixed income allocations. Absolute return strategies that target a positive return irrespective of market direction are gaining popularity, as lower return expectations and the potential for capital losses have led to increasing demand for income oriented investments that focus on capital preservation.
The US agency mortgage-backed securities (MBS) market may provide an attractive solution for investors seeking a liquid and high-quality asset class that provides diversification to risk assets with added benefits for absolute return such as a consistent yield advantage and downside protection features.
This paper is the first in a two-part series by Macquarie Investment Management. Part l describes the agency MBS opportunity set, highlighting the standalone and absolute return features of the asset class while providing a case study of historical performance in a rising rate environment. Part II presents Macquarie’s Absolute Return Mortgage-Backed Securities strategy, which uses this unique asset class in its aim to provide investors with consistent strong risk-adjusted returns and downside protection.
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