MTBA: High-Quality Agency MBS, Great Strategy, Above-Average Yield

In a financial landscape marked by persistent inflation and aggressive Federal Reserve rate hikes, investors are increasingly seeking yield without sacrificing capital preservation. The Simplify MBS ETF (MTBA) has emerged as a compelling option, leveraging its focus on high-quality agency mortgage-backed securities (MBS) and innovative duration management strategies to deliver competitive returns. This article examines how MTBA's active approach to risk, yield optimization, and alignment with the current rate environment position it as a standout choice for income-focused investors.

The Resilience of Agency MBS in a Rising Rate Environment

Agency MBS, backed by government-sponsored enterprises like and Freddie Mac, have demonstrated remarkable resilience amid the Fed's 525-basis-point rate hikes since 2022. According to a report by Seeking Alpha, agency MBS have outperformed benchmark U.S. , . This outperformance is driven by wider spreads between mortgage rates and Treasury yields, which reached multi-decade highs during the 2023–2025 period. MTBA, , has capitalized on this environment, .

The Federal Reserve's recent rate cuts in late 2024 and early 2025 have introduced volatility, but MTBA's focus on newer, shorter-duration MBS provides a buffer. These securities, issued in 2023 and 2024, have maturities that reduce sensitivity to rate fluctuations compared to legacy MBS held in traditional indices. This structural advantage aligns with the Fed's cautious stance on further easing, which has kept yields in a range-bound environment.

Active Carry and Duration Management: MTBA's Strategic Edge

MTBA's value proposition is further strengthened by its active management of carry and duration. The fund employs to-be-announced (TBA) contracts and dollar roll techniques to optimize returns. TBAs, forward contracts on MBS, allow MTBA to lock in favorable pricing and liquidity while avoiding the prepayment risks inherent in legacy MBS as noted by Simplify Managing Partner . By rolling these contracts monthly, the fund maintains flexibility in a dynamic rate environment.

Duration management is another cornerstone of MTBA's strategy. Unlike traditional MBS indices, which are weighted toward older, longer-duration securities, MTBA prioritizes newly issued MBS with shorter maturities. This approach reduces exposure to interest rate volatility and enhances capital preservation. The fund's average duration is significantly shorter than the MBS Index, making it less vulnerable to rate shocks while maintaining attractive yields.

Risk Mitigation in a High-Rate, High-Volatility Climate

Rising rates and economic uncertainty have heightened risks for fixed-income investors. However, MTBA's risk management framework, supported by automation and real-time scenario analysis, addresses these challenges. Treasury teams across industries are increasingly adopting advanced systems to simulate rate scenarios and hedge losses, and MTBA's structure mirrors these best practices. The fund's focus on agency MBS also minimizes credit risk, as these securities are guaranteed by GSEs, ensuring principal and interest payments even in economic downturns.

Moreover, MTBA's active approach to reinvestment risk is critical. By avoiding legacy MBS with low coupons and long durations, the fund sidesteps the refinancing risks that could erode yields if rates decline. This is particularly relevant as the Fed's rate-cutting cycle remains constrained by inflation concerns and potential tariff-driven inflation.

Conclusion: A Strategic Fit for the 2025 Landscape

The Simplify MBS ETF (MTBA) stands out in a rising rate environment by combining high-quality agency MBS with innovative strategies that prioritize yield, liquidity, and risk mitigation. Its focus on newly issued, shorter-duration securities, coupled with active carry management and TBA contracts, positions it to outperform traditional MBS indices and corporate fixed-income alternatives. While risks such as rate volatility and refinancing potential persist, MTBA's structural advantages and alignment with current macroeconomic trends make it a compelling choice for investors seeking income without sacrificing capital protection.

As the Fed navigates a delicate balance between inflation control and economic growth, MTBA's disciplined approach ensures it remains well-positioned to deliver value in 2025 and beyond.