RMBS in Midsummer: Spreads, Risks and Relative Value

As we approach the administration’s new set of deadlines for trade negotiations — and anticipate additional trade-related volatilities — which factors may drive U.S. RMBS performance?

The charts below present option-adjusted spreads (OAS) across agency RMBS’ (Ginnie Mae and Fannie Mae) discount coupons (2.5s) and current coupons (6.5s), as well as for nonagency RMBS (non-qualified-mortgage and prime jumbo). These are compared with investment-grade (IG) and high-yield (HY) corporate-bond spreads over the past five quarters.

In early August 2024, spreads modestly widened following the release of a weaker-than-expected July jobs report. The market quickly stabilized; and by year-end, strong fundamentals, robust earnings and reduced policy uncertainty drove corporate and RMBS spreads to near-historic tightness. Another period of spread widening occurred after April 2, when renewed tariff tensions sparked a risk-off response. The market stabilized once again afterward: RMBS spreads have remained largely range-bound, while corporate spreads have again approached historically low levels.

Within agency RMBS, Ginnie Mae discounts have exhibited tighter OAS relative to Fannie Mae counterparts, reflecting the former’s explicit government guarantee and favorable bank risk-based-capital treatment. For current coupon 6.5s, Ginnie Mae has continued to underperform, partly due to prepayment issues for Veterans Affairs home loans. Ginnie Mae 6.5s’ spread relative to Fannie Mae’s has narrowed significantly compared to 2024 levels, however. 

RMBS spreads also exhibited low volatility, with the exception of the period following the April 2 “Liberation Day” tariff announcement. The chart below shows spread movements from April 2 onward, compared with similar movements in corporate spreads.

In the two weeks following April 2, both corporate and RMBS spreads widened. Corporate spreads — especially those for HY — exhibited more volatility than those of RMBS, however. This reflected investor sentiment that consumer credit risk is safer than that for corporate credit during potential economic slowdowns triggered by trade policy.

Since then, both markets have largely shrugged off trade-policy uncertainty, exhibiting low volatility in response. This reflects confidence in strong macroeconomic fundamentals, the Federal Reserve’s steady rate signaling and robust demand for yield. Notably, IG corporate spreads have rallied further to historically tight levels.

For RMBS and consumer credit broadly, home-price dynamics are a key macroeconomic driver. The charts below show home-price appreciation has generally slowed across the U.S., particularly in previously hot housing markets such as Florida, Georgia, Arizona and California. In Florida, for example, certain metropolitan statistical areas have seen flat to negative house-price trends — some of them anecdotally driven by disaster-insurance costs.

Source: Federal Housing Finance Agency, MSCI 

Seasoned RMBS securities are generally protected by accumulated home equity from the large home-price increases in recent years. Investors in new-issue RMBS securities may need to focus on potential adverse home-price trends in selected geographic areas.

If credit fundamentals remain benign, the relative performance of RMBS and corporate bonds will be driven by carries and room for further spread tightening. The table below shows the latest OAS levels, and their one- and three-year historical percentiles for IG corporate bonds, agency RMBS and senior nonagency RMBS. The RMBS generally have higher OAS levels — and hence duration-adjusted carries. 

As corporate credit spreads have narrowed to historically tight levels, the focus shifts to where incremental return opportunities might still exist, versus RMBS potentially with room for further spread tightening. Non-agency RMBS have continued to offer attractive carry benefits, underpinned by overall housing-market strength and collateral performance. Agency MBS may also earn additional convexity carries if rates stay stable and prepayment stays benign. 

As the year progresses, investors may find value scrutinizing carry opportunities and relative value across segments. In a market defined by compressed spreads and selective dispersion, RMBS may benefit from potential investor diversification and sector rotation.