MBB owns the entire U.S. mortgage-backed securities market that matters — agency MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae. This is the boring-but-essential part of fixed income that acts like government bonds with slightly higher yields.
How It Works
The fund tracks the Bloomberg U.S. MBS Index, holding pass-through securities where homeowners' mortgage payments flow to investors. It maintains a duration around 5-6 years through the prepayment lottery — when rates fall, homeowners refinance and you get your money back early at par. The portfolio constantly churns as mortgages prepay and new production enters the index.
Key Features
- Government backing means zero credit risk — you're worried about prepayments, not defaults
- Yields 30-50 basis points above comparable Treasuries for accepting prepayment uncertainty
- Negative convexity profile — gains less when rates fall due to refinancing surge
Risks
- Prepayment risk can cap upside — a 2% rate drop might only deliver 3-4% price gains vs 8%+ for Treasuries
- Extension risk in rising rates — duration stretches from 5 to 7+ years as refinancing dies
- Fed ownership distorts the market — they own 25% of agency MBS, creating artificial scarcity
Who Should Own This
Perfect for core bond allocations where you want government-quality credit with a yield pickup. Insurance companies and banks own tons of this stuff for regulatory reasons. Individual investors should use it as a Treasury substitute when you're getting paid enough extra yield (30+ bps) to compensate for the prepayment headaches.