Mortgage-backed securi-ties, a somewhat overlooked, though very large, section of the fixed-income universe, are becoming more attractive to investors in light of a softening housing market and slipping Treasury yields. Mortgage-backed securities, which represent an ownership in a group of mortgages and trade like bonds, provide higher yields relative to other fixed income vehicles. Moreover, with declines in construction spending and new housing sales, new mortgage applications and refinancings will likely decline–thereby, creating a tighter supply and increasing their value as investments.
Historically, mortgage-backed securities tended to outperform the broader fixed-income universe during periods of rising interest rates. Indeed, year-to-date through August 31, the Lehman Mortgage-Backed Securities Index gained 2.85%, versus a 2.16% rise for the Lehman Aggregate Index and a 1.72% return for the Lehman Government/ Credit Index.
One of the top fund performers in this sector, the $85-million Huntington Mortgage Securities Fund (HMTGX) can invest in mortgage-backed securities, as well as U.S. government bonds and real estate investment trusts (REITs).