As the Fed plans to cut back on mortgage purchases, get target duration with MBSD

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It is difficult to gauge the uncertainty in an exchange-traded fund (ETF) product, but with interest rates at the whim of the Federal Reserve, it helps to get the target duration from MBS Index Fund with FlexShares Disciplined Duration (MBSD)

Shrinking or not shrinking will be a question as the Federal Reserve ponders what to do with the purchase of mortgage-backed securities. Meanwhile, the target duration could help reduce some of the uncertainty about the Fed’s next move.

“The debate over whether the Fed should cut back its purchases of mortgage-backed securities faster than buying Treasury debt will likely be high on the agenda when officials meet to discuss next policy moves on July 27-28. “, – he said. Bloomberg article reported.

MBSD is committed to investment performance that is broadly in line with the price and yield of ICE BofA Merrill Lynch, an index of US limited-maturity mortgage-backed securities.

The benchmark index reflects the dynamics of a sample of transit securities backed by mortgage-backed housing stock of US investment-grade agencies. Typically, the fund invests, under normal circumstances, at least 80% of its total assets (excluding collateral received from the provision of securities) in the underlying index securities and in “TBA Trades” representing the securities in the underlying index.

“The index is composed of securities selected from the aggregate of 10-year, 15-year and 30-year MBS,” added Fund Focus. “The index aims to maintain monthly effective duration within an annual range of 3.25 to 4.25 years with a target average of 3.75 years. This range was chosen to avoid more fluidity than is potentially necessary to maintain the target duration. The index is also influenced by factors such as the current policy of the Federal Reserve, the outlook for US interest rates and potential reforms of agency mortgage programs. “

Solution for generating income

In addition, the current low interest rate situation can be improved by using assets such as mortgage-backed securities as a source of income.

“Many investors are looking at Mortgage Backed Securities (MBS) as an opportunity to diversify their fixed income assets and achieve higher potential returns than can be obtained from US Treasury bonds.” FlexShares Fund Focus the article says. “However, when investing in MBS, special attention is paid to duration – a key indicator of the sensitivity of fixed income securities to fluctuations in interest rates.”

“We believe that, historically, duration has been the primary risk and return factor for MBS, and that investors should continually monitor the effective duration of the MBS portfolio due to the impact of early mortgage payments,” added FlexShares.

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