Fixed-Rate Mortgage Securities and Capital Preservation in a Stable-Rate Environment: A 2025 Investment Analysis

The U.S. fixed-rate mortgage securities market has navigated a complex landscape in 2023–2025, marked by gradual declines in mortgage rates and a resurgence in refinancing activity. As of December 2025, the 30-year fixed-rate mortgage averaged 6.19%, down 0.5 percentage points year-over-year, while the 15-year FRM stood at 5.44% according to Freddie Mac data. These trends, coupled with a 63% year-over-year surge in refinance activity in Q2 2025, have reshaped investor strategies around capital preservation and yield optimization. This analysis explores how fixed-rate mortgage securities and related instruments-such as agency MBS, CMOs, and non-agency MBS-are positioning themselves in a stable-rate environment.

Fixed-Rate Mortgage Securities: A Pillar of Predictability

Fixed-rate mortgage-backed securities (MBS) remain a cornerstone for capital preservation due to their predictable cash flows. Instruments like J.P. Morgan Mortgage Trust 2025-CES6, backed by fully amortizing single-family residential loans, offer investors consistent returns even amid market volatility according to SP Global ratings. This stability is critical in a low-volatility rate environment, where refinancing activity has driven mortgage securitizations up 11% year-over-year in Q2 2025 according to Milliman research.

The resilience of these securities is further underscored by Fannie Mae's Q3 2025 performance, which reported $3.9 billion in net income and $109 billion in liquidity provided to the mortgage market. Such liquidity supports over 400,000 households annually, reinforcing the role of fixed-rate MBS in maintaining housing affordability while generating stable yields.

Agency MBS and CMOs: Balancing Yield and Risk

Agency MBS, backed by government-sponsored entities like Fannie Mae and Freddie Mac, have demonstrated resilience in a stable-rate environment. Despite historical volatility during rapid rate hikes, agency MBS spreads have remained above long-term averages, offering relative value to investors according to Michael Benedict's analysis. This is partly due to higher coupon rates on current-issue MBS, which buffer against price declines in rising-rate scenarios.

Collateralized mortgage obligations (CMOs) built from 30-year MBS have also gained traction. By structuring cash flows into tranches with varying maturities, CMOs allow investors to tailor risk-return profiles. For instance, Ginnie Mae CMOs now account for two-thirds of new CMO issuance, reflecting their perceived safety and predictable returns according to Catalyst Corp analysis. However, CMO issuance slowed in mid-2025, with June's volume dropping 27% from May, as investors adopted a more cautious stance amid lingering affordability challenges according to Catalyst Corp analysis.

Non-Agency MBS and Inverse TBAs: Yield Opportunities in a Stable Market

Non-agency MBS, which lack government guarantees, have seen robust demand in 2025. Year-to-date issuance reached $161.8 billion, surpassing 2024's total of $139.5 billion according to Annaly Capital data. These securities offer higher yields to compensate for credit risk, with spreads trading nearly 20 basis points wider than long-term averages according to Morgan Stanley research. Improved credit quality in underlying mortgage pools-driven by tighter lending standards and low delinquency rates-has bolstered investor confidence according to Morgan Stanley research.

Inverse TBAs (to-be-announced mortgage-backed securities) also play a role in yield optimization. In low-volatility periods, inverse TBAs benefit from falling interest rates through price appreciation. For example, Annaly Capital Management reported an 8.1% economic return in Q3 2025, with a 5.40% average yield on interest-earning assets, highlighting the potential of these instruments in stable-rate environments according to Annaly Capital data.

Strategic Considerations for Investors

In a stable-rate environment, investors are prioritizing securities with collateral rates aligned with current market levels to mitigate prepayment risks. Agency-backed CMOs and MBS are favored for their balance of yield and capital preservation, while non-agency MBS and inverse TBAs offer higher returns for those willing to accept additional risk.

Looking ahead, economic forecasts suggest mortgage rates will remain near 6.5% in 2025 and 6.3% in 2026 according to Fannie Mae research. This stability is likely to sustain demand for fixed-rate mortgage securities, particularly as institutional investors seek stable income streams. However, the Fed's anticipated rate cuts later in 2025 could further differentiate the performance of stable value funds and money market instruments, with the former gaining appeal for long-term capital preservation according to Stable Value research.

Conclusion

The 2023–2025 period has reaffirmed fixed-rate mortgage securities as a reliable vehicle for capital preservation and yield optimization in stable-rate environments. Agency MBS and CMOs provide predictable cash flows, while non-agency MBS and inverse TBAs offer higher yields for risk-tolerant investors. As the market navigates a soft-landing scenario, the interplay between these instruments will remain critical for balancing risk and return.