Income, diversification and resilience through mortgage-backed securities

In today's higher-rate environment, we believe mortgage-backed securities (MBS) can offer a differentiated combination of income, diversification and resilience, complementing traditional fixed income allocations.

05 November 2026

Investors are increasingly seeking sources of income that are less dependent on conventional corporate credit and more resilient to interest-rate and economic uncertainty.

Against this backdrop, we believe mortgage-backed securities (MBS), particularly non-agency residential mortgage-backed securities (RMBS), can help address these needs. Backed by pools of residential mortgages rather than corporate balance sheets, the asset class offers exposure to secured consumer credit, attractive spread levels and historically low correlations with many traditional fixed income sectors.

We believe non-agency RMBS continue to offer attractive value relative to many other areas of fixed income. Despite elevated interest-rate volatility and rising government bond yields in 2026, spreads have remained broadly stable and continue to compare favourably with many corporate credit sectors. We find legacy non-agency RMBS, which are private-label mortgage bonds issued prior to the 2007-2009 global financial crisis (GFC), particularly attractive. These securities are backed by seasoned mortgage pools with established repayment histories and can offer attractive income with historically stable cash-flow characteristics.

In our view, this may support attractive income opportunities while reducing reliance on corporate earnings, refinancing conditions and other traditional corporate credit drivers.

Traditional fixed income portfolios typically combine government bonds, investment-grade corporate credit and high-yield bonds. While these sectors offer different sources of return, many remain influenced by common drivers such as economic growth and corporate earnings.

RMBS provide exposure to a different source of risk. Rather than relying on the creditworthiness of individual companies, they are backed by diversified pools of residential mortgages and the underlying properties securing those loans. Historically low correlations with many traditional investment sectors mean RMBS can introduce differentiated return drivers and help broaden portfolio diversification.

Chart 1: Correlation Matrix

Correlation of US MBS with selected indices, 30 Sep 2006 to 30 Sep 2026

One concern for fixed income investors today is whether a higher-inflation environment could weaken household finances and increase credit risk. In our view, residential mortgage credit is relatively well positioned.

Unlike many borrowers globally, most US homeowners with mortgages have fixed-rate loans, with the vast majority on fixed-rate terms of more than 15 years¹, meaning rising market interest rates do not increase their scheduled principal and interest payments. As inflation drives wage growth over time, mortgage payments may become more affordable relative to household incomes, while regular repayments continue to reduce outstanding loan balances.

This combination of fixed payment obligations, rising incomes and ongoing mortgage amortisation can strengthen borrower credit profiles over time. While inflation may place pressure on household budgets in the short term, seasoned residential mortgage exposures have historically benefited from the fact that mortgage payments remain fixed while household incomes and asset values adjust.

The prevalence of fixed-rate mortgages has also contributed to the well-known "lock-in" effect in the US housing market. Homeowners are often reluctant to give up historically low mortgage rates and refinance at higher prevailing rates. As at Q2 2026, 49% of outstanding US mortgages had interest rates below 4%², illustrating the significant gap between rates on many existing mortgages and those available to new borrowers. This can limit housing supply and help support property valuations. In our view, this provides an additional layer of support for the collateral underpinning residential mortgage credit.

Chart 2: US outstanding mortgages by interest rate

Beyond the resilience of the borrower, we believe a key strength of non-agency RMBS lies in the quality of the underlying collateral.

Legacy non-agency RMBS are backed by seasoned mortgages originated before the GFC. Over the intervening years, homeowners have typically built substantial equity through a combination of house-price appreciation and mortgage repayment. As a result, many loans now benefit from low loan-to-value ratios and significant homeowner equity.

The accumulated equity typically provides an important cushion against economic weakness or declines in house prices. Even if property values were to soften, the value of the underlying home may remain well above the outstanding mortgage balance, helping to limit potential credit losses.

The broader US housing market also continues to benefit from favourable supply-demand dynamics³. Years of underbuilding, combined with strong demand from millennials entering their prime home-buying years, have helped support housing valuations⁴. While affordability constraints may limit future appreciation, we believe constrained supply and relatively healthy household balance sheets continue to provide support for the market.

Importantly, the resilience of the asset class does not depend on continued house-price growth. In our view, the substantial equity already built up in many seasoned mortgage pools provides a significant layer of protection.

The broader non-agency RMBS market also benefits from structural protections. Many investment-grade securities benefit from subordination, where lower-ranking bonds absorb losses first, as well as other credit enhancements designed to provide additional protection for investors.

Chart 3: S&P Cotality Case-Shiller US National Home Price SA Index

From 31 January 1987 to 31 January 2026

The US mortgage market has evolved significantly since the GFC. Tighter underwriting standards, stronger regulation and enhanced oversight have improved the quality of mortgage lending and strengthened the broader securitisation market.⁵ Today, MBS is one of the largest and most liquid segments of the US fixed-income market, with more than USD 9 trillion of bonds outstanding⁶ and accounting for approximately 22% of the US fixed income market⁷, second only to US Treasuries.

Importantly, investors should distinguish between different parts of the MBS market. During the financial crisis, non-agency mortgage credit was severely affected by weak underwriting standards and the collapse of the subprime lending market. By contrast, government-guaranteed agency MBS proved considerably more resilient. Indeed, US agency MBS generated positive returns over the period, returning 14.2% between 1 October 2007 and 31 March 2009, compared with a decline of 23.6% for US high-yield bonds⁸. Having navigated the GFC, we believe detailed collateral analysis and disciplined security selection remain critical, particularly in a market where performance can vary significantly across sectors and securities.

In our view, today's market looks very different from the one that existed before the financial crisis. Borrower fundamentals are stronger, homeowner equity is substantially higher and mortgage debt as a percentage of GDP remains well below pre-crisis levels, at approximately 67% today⁹ versus 97% in 2006¹⁰.

We believe MBS can play a valuable role within a broader fixed income allocation by providing a differentiated combination of income, diversification and resilience.

Historically low correlations and relatively low volatility can help diversify exposure beyond government bonds and corporate credit. Attractive spreads can provide income potential, while resilient underlying collateral, substantial homeowner equity and structural credit protections help support the asset class through different market environments.

Combined with rigorous collateral analysis and active interest-rate management, these characteristics can make non-agency RMBS a valuable complement to traditional fixed income allocations. 

*Tom Mansley is an Investment Director with GAM USA Inc., specialising in mortgage- and asset-backed securities (MBS and ABS) and leads GAM Investments' mortgage-backed securities strategy.

GAM Investments (‘GAM’) is the trading name of GAM Holding AG and its subsidiaries.