Timely Insights from T. Rowe Price Insurance Asset Management

February 2025

Current Market Dynamic:

A combination of wider spreads and a steepening of the yield curve has resulted in current mortgage-backed securities (MBS) index yields trading essentially flat to Investment-Grade (IG) Corporate index yields (Figure 1).
This spread relationship is rare: Since 2009, the spread between MBS index yields, as measured by the full Agency MBS Component of the Bloomberg US Aggregate Bond Index, and IG index yields, as measured by the Bloomberg US IG Corporate Bond Index, has been wider than its current level 98% of the time, based on T. Rowe Price analysis.
It is important to note that this index level comparison is for the overall MBS index, which as of January 2025 is dominated by discount MBS. This dynamic has resulted in an average index convexity that is positive.
MBS trading at par currently offer yields approximately 40 basis points higher than both the MBS index and the IG Corporate. We believe this yield premium serves as compensation for the greater relative convexity risk of par-priced MBS.

The Market Opportunity:

Par-priced MBS should have stable yields, but the greater convexity could result in in less stable cash flows.
Conversely, IG Corporates offer comparably lower yields but more certain cash flows (Figure 2). Discount MBS offer more favorable capital treatment but similar yields to IG Corporates, as measured by the Bloomberg MBS Current Coupon Index.
Yield-based investors have the potential opportunity to capitalize on this unique situation and tailor their MBS exposures, balancing their yield and convexity risk objectives.

Additional Disclosures

Bloomberg®” and the Bloomberg indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by T. Rowe Price. Bloomberg is not affiliated with T. Rowe Price, and Bloomberg does not approve, endorse, review, or recommend the Bloomberg indices. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the Bloomberg indices.

Important Information

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.

Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall.

Mortgage-backed securities are subject to credit risk, interest-rate risk, prepayment risk, and extension risk.

USA - Issued in the USA by [T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.

202501-4168445

Download

Latest Date Range

Audience for the document: Share Class: Language of the document:

Download Cancel

Open

Share Class: Language of the document:

Open Cancel

Change Details

If you need to change your email address please contact us.

Subscriptions

You are ready to start subscribing.

Get started by going to our products or insights section to follow what you're interested in.

Products Insights

GIPS^® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. T. Rowe Price has been independently verified for the 27-year period ended June 30, 2023, by KPMG LLP. The verification report is available upon request. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm’s policies and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide basis. Verification does not provide assurance on the accuracy of any specific performance report.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request.

Other Literature

You have successfully subscribed.

Notify me by email when

regular data and commentary is available
exceptional commentary is available

new articles become available