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Mortgage Bond Profits May Fuel Corporate Bond Boom
18 Jan
Summary
- Investors may rotate out of mortgage bonds into corporate debt.
- Mortgage bonds have yielded significant returns, reaching highs.
- Corporate bond issuance could increase due to AI infrastructure needs.
Demand for corporate bonds may soon receive an unexpected boost from investors capitalizing on gains in US mortgage bonds. These mortgage-backed securities have achieved notable returns, prompting a discussion among market watchers about a potential rotation into other assets. This trend is particularly relevant as risk premiums on newly produced mortgage bonds have narrowed significantly, reaching their tightest levels since 2022.
While some large firms still favor mortgage bonds due to historically low valuations in corporate notes, the landscape is shifting. The recent outperformance of mortgage bonds, partly driven by directives concerning Fannie Mae and Freddie Mac, has diminished their relative attractiveness. Strategists at major financial institutions are revising their outlooks, moving to neutral on mortgage bonds due to current valuations.
Concurrently, the corporate bond market may see increased activity, with record sales of high-grade bonds anticipated, partly to finance artificial intelligence infrastructure. Coupled with expectations of reduced US Treasury sales, this could encourage investors to move funds from Treasuries into company debt, signaling a potentially dynamic period for fixed-income markets.
