Chapter

Agency Mortgage-Backed Securities

Ion Dan and Philip O. Obazee

in The Handbook of Mortgage-Backed Securities

Published in print August 2016 | ISBN: 9780198785774
Published online October 2016 | e-ISBN: 9780191827594 | DOI: https://dx.doi.org/10.1093/acprof:oso/9780198785774.003.0011
Agency Mortgage-Backed Securities

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This chapter reviews the historical performance of agency mortgaged-backed securities (MBS). Over time, this asset class has delivered an attractive risk–reward profile compared to other high-grade fixed-income sectors. The results hold across multiple market environments, including stress scenarios such as the financial crises of 2008–9. Agency MBS delivered superior returns compared to Treasuries and better risk-adjusted returns compared to corporate bonds. The liquidity and yield advantage of agency MBS are key features behind the performance, while the inherent prepayment risk makes their analysis particularly complicated. The complexity of prepayment modeling makes analyzing this sector a task of balancing science with art, which materially leads to some market inefficiencies. The chapter also discusses prepayment modeling and valuation approaches with a focus on concept and practical application.

Keywords: agency mortgage-backed securities; MBS; asset class; fixed-income sectors; Treasuries; liquidity; yield advantage; prepayment modeling

Chapter.  6800 words.  Illustrated.

Subjects: Financial Markets ; Macroeconomics and Monetary Economics

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