Agency MBS Offer a Compelling Current Opportunity for Reserve Managers

Agency MBS are unusually attractive for reserve managers because yields are near multi-decade highs while prepayment risk remains exceptionally low.

• As of late September 2026, agency MBS yields were 5.95%, close to the highest levels recorded since 2006 in the Bloomberg US MBS Index.
• These yields exceeded those of Aa-rated corporate bonds, offering higher income from securities backed by residential loans with an implicit or explicit US government guarantee rather than unsecured corporate credit.
• The outstanding conventional 30-year mortgage universe had an effective mortgage rate near 4.5%, while prevailing mortgage rates were around 7.5%.
• The refinancing incentive was -2.91 percentage points as of September 30, 2026, close to the historical low of -3.83 percentage points reached in October 2023.
• Low refinancing incentives should keep prepayments muted, making MBS cash flows more predictable; agency MBS also benefit from being the second-largest and one of the most actively traded US fixed-income markets after Treasuries.

Takeaway: Reserve managers should reassess portfolio construction and consider agency MBS for their yield and diversification advantages, without abandoning Treasuries or taking uncompensated risk.