The Fed announced that it will be buying $300 billion in long-term treasuries. It also announced another $700 billion in mortgage-debt purchases, bringing the grand total on the latter to $1.4 trillion.
Some are calling it bold. Others are calling it "Sylvester Stallone Rambo-esque." Still others say we are witnessing the beginning of the end for U.S credibility as well as "credit-ability."
Yet if the old axiom on investing success still holds true (i.e. "Don't Fight the Fed"), shouldn't investors be buying what the Fed is buying? And I am not talking about treasury bonds, since the Fed is merely looking to keep yields low enough to keep mortgage applications on the upswing.
I am talking about mortgage debt. If the Fed is purchasing mortgage debt, does it make sense to look at investments that specialize in holding mortgage debt?
Granted, you're not going to want to risk acquiring the so-called toxic, sub-prime stuff. Nevertheless, there are a number of investment-grade mortgage debt products; if they've been beaten with the ugly stick due to guilt by association, perhaps they're worthy of a gander or three these days.
Consider the iShares MBS (Mortgage-Backed Securities) Bond Fund (NYSEARCA:MBB). It's a stone's throw from a 52-week high. It's above its long-term 200-day moving average. With 95% of the holdings rated AAA, it carries a fund rating of AAA by S&P. And its current distribution yield is roughly 3.3%.
On the year, the investment has marginal gains. Since the peak of the credit crisis in late November, however, there's been a solid 10% in capital appreciation and another 2% in distribution yield. I'm not necessarily a buyer, but I am keeping a watchful eye on MBB.
The closed-end universe also has a number of general mortgage bond funds. For example, the First Trust FIDAC Mortgage Income Fund (NYSE:FMY) boasts an average credit quality of AAA. It also has a 3-year compounded return of 5.25%. Distributions come monthly AND they're coming at an annual yield of 8.3% right now.
I am, however, quite put off by the 2%+ management fees and the low volume. That does make it a bit harder to get excited about the CEF as an alternative to the ETF. What's more, while not a true apples-to-apples comparison (e.g, different bond maturities, etc.), the iShares MBS Bond Fund (MBB) has outperformed the First Trust FIDAC Mortgage Income Fund (FMY) over the last 2 years.
The Blackrock Income Trust (NYSE:BKT) may be a bit more desirable to the First Trust vehicle for some folks. BKT is widely traded. More than 90% of its holdings have the coveted AAA rating. And while its distribution yield of 4.85% may not seem as enticing as 8%+, BKT has a 20-year track record of compounding at close to 7%.
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