What is an MBS portfolio?

A mortgage-backed security (MBS) is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. Investors in MBS receive periodic payments similar to bond coupon payments.

What is MBS strategy?

The Mortgage-Backed Securities strategy invests primarily in agency mortgage-backed securities (MBS), with the ability to invest in Treasurys, U.S. agencies, and non-agency MBS. This strategy invests entirely in U.S. based issuers, so the credit risk is indirectly the U.S. government and U.S. taxpayers.

How are Tbas traded?

In a TBA trade, the seller of MBS agrees on a sale price, but does not specify which particular securities will be delivered to the buyer on settlement day. Instead, only a few basic characteristics of the securities are agreed upon, such as the coupon rate and the face value of the bonds to be delivered.

What is the MBS basis?

Shorting the Agency MBS Basis (“Short MBS Basis”) This is a neutral duration, long volatility trade that benefits if the spread between the Agency MBS and the Treasury widens (i.e., increases).

Why do investors buy MBS?

Like most financial innovations, the purpose of an MBS is to increase return and diversify risk. By securitizing pools of similar mortgages, investors can absorb the statistical likelihood of non-payment.

What happens to MBS when interest rates rise?

Mortgages and MBS experience negative convexity. When mortgage rates go up, the price of MBS goes down by a greater amount than the price goes up when rates go down by the same amount. As rates fall, MBS prices go up less (compared to other bonds) because of refinancing, where the maturity of mortgages becomes shorter.

How MBS is created?

To create a MBS, a lending bank first pools together a group of mortgage loans that it has issued. The bank then presents this pool of mortgages to a government-sponsored agency designated to issue and guarantee MBS. The agency issuing the MBS guarantees the timely payment of principal and interest to MBS investors.

Are MBS traded OTC?

As such, most MBS have an interest or dividend payment structure and are traded in over-the-counter (OTC) markets or on exchanges.

How do you price MBS?

MBS Prices Depend On The Economy A $100 MBS priced at $100 is said to be “at par.” If a particular MBS has a “coupon rate” of 4.0 percent, its buyer will receive $4 interest each year. If investors consider $4 a fair return for the amount of risk in the pool, the MBS will sell at par.

Why did MBS fail?

The Bottom Line. The ultimate cause of the subprime mortgage crisis boils down to human greed and failed wisdom. The prime players were banks, hedge funds, investment houses, ratings agencies, homeowners, investors, and insurance companies. Banks lent, even to those who couldn’t afford loans.