Mortgage-Backed Securities in a Post-Crisis Era: Opportunities in a Resilient Secondary Market

The U.S. mortgage-backed securities (MBS) market has long been a barometer of macroeconomic health and investor sentiment. In the aftermath of the 2008 financial crisis, the industry was reshaped by stricter regulations, a shift toward government-backed guarantees, and a recalibration of risk-return trade-offs. Today, in 2025, the market finds itself at a crossroads. Agency and non-agency MBS are diverging in performance and risk profiles, driven by a confluence of Fed policy, housing market fundamentals, and evolving investor preferences. For fixed-income investors, understanding this divergence is critical to unlocking value in a secondary market that remains both resilient and complex.

Agency MBS: A Defensive Play in a Volatile World

Agency MBS, backed by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac, have become increasingly attractive in a post-crisis era defined by geopolitical uncertainty and prolonged high interest rates. As of 2025, these securities trade at spreads of approximately 140 basis points (bps) over Treasuries, a level that has persisted since 2022 and reflects a reversal of historical norms. Typically, agency MBS traded tighter than corporate credit, but today's environment—marked by quantitative tightening (QT) and reduced demand from banks—has flipped this dynamic.

The Federal Reserve's QT program, which has reduced its MBS holdings by $510 billion since 2022, has created a supply-side headwind for agency MBS. Meanwhile, corporate credit markets have thrived under strong demand, keeping spreads artificially tight. This dislocation has elevated agency MBS to a position of relative value. For instance, the current coupon (CC) spreads on agency MBS have traded at a premium to investment-grade (IG) corporates since 2022, a rare inversion that underscores their defensive appeal.

Key to this resilience is the near-zero prepayment risk. With 70% of existing U.S. mortgages locked in at rates below 5% (from 2020-2021), refinancing activity has collapsed. Mortgage rates have averaged 6.6% in 2025, making prepayment economically unattractive for most homeowners. This low prepayment environment has reduced negative convexity—the risk of declining cash flows when rates fall—and enhanced the Sharpe ratio of agency MBS. Historically, these securities have outperformed IG corporates during equity market corrections, a trait that has become increasingly valuable in a world where geopolitical tensions and trade disputes (e.g., U.S.-China tariffs) drive volatility.

Non-Agency MBS: The High-Yield Alternative

Non-agency MBS, particularly those backed by non-qualified mortgages (non-QM), offer a starkly different risk-return profile. These securities lack the GSE guarantee and are often issued to borrowers with weaker credit profiles. Yet, in 2023-2025, non-agency MBS spreads have narrowed to levels that rival even investment-grade corporate bonds. This compression reflects a broader risk rally in credit markets, driven by low default rates and robust housing equity.

Post-2008, underwriting standards were tightened, and U.S. homeowners now hold significantly higher equity in their homes compared to the pre-2008 era. Combined with a low incidence of delinquencies, this has kept default rates in check. However, the absence of a government guarantee means non-agency MBS remain more sensitive to economic downturns. For example, a recession triggered by trade wars or a Fed misstep could expose these securities to higher losses.

The current yield premium of non-agency MBS over similarly rated corporates is compelling but comes with caveats. While spreads have narrowed to attract investors, the underlying credit risk remains elevated. This creates a potential mispricing, especially if market conditions deteriorate. For risk-tolerant investors, non-agency MBS offer a high-yield alternative to corporate debt, but their performance is more correlated with broader economic health than the defensive qualities of agency MBS.

Macro Dynamics and the Road Ahead

The interplay of Fed policy and housing market fundamentals will shape the future of MBS. The Federal Reserve's anticipated rate-cutting cycle—projected to begin in late 2025—could reignite refinancing activity, though even a 50-basis-point rate cut is unlikely to erode the current prepayment risk premium. Moreover, the end of QT may stabilize MBS supply, supporting tighter spreads and improved liquidity.

Investors must also weigh the implications of prolonged inflation uncertainty. While the Fed's forward guidance suggests a measured rate-cutting path, volatility in inflation expectations could delay or accelerate these cuts, creating headwinds for MBS valuations. However, the housing market's resilience—bolstered by low delinquencies and high equity—provides a buffer against near-term shocks.

Investment Implications

For fixed-income portfolios, agency MBS offer a unique combination of yield, credit safety, and diversification. Their historical outperformance during equity downturns makes them a natural hedge in volatile markets. Investors seeking higher returns may allocate to non-agency MBS, but should do so cautiously, given their exposure to credit risk. A balanced approach—leveraging the defensive qualities of agency MBS while selectively tapping into the yield of non-agency—could optimize risk-adjusted returns.

In a world where central banks are still navigating the aftermath of the 2023 rate hikes and geopolitical tensions remain unresolved, the MBS market provides a rare blend of stability and opportunity. The key lies in understanding the nuances of agency and non-agency structures and aligning them with macroeconomic expectations. As the secondary market continues to evolve, those who master this balance will find themselves well-positioned to capitalize on its resilience.