Wall Street loves this sector for its attractive yields and relative value.

High interest rates have been beneficial for Americans holding cash, but financial experts are advising investors to look ahead and consider their options. Many people have been putting their money into cash vehicles like money market funds and certificates of deposit since the Federal Reserve began raising interest rates. Total money market fund assets reached a record $6.12 trillion recently, according to the Investment Company Institute. While interest rates are projected to remain higher for longer, the Federal Reserve only expects one rate cut this year. This could prompt investors to stay in short-term instruments to maximize yields, but there is the risk of lower yields in the future. Kathy Jones, chief fixed-income strategist at the Schwab Center for Financial Research, suggests that investors looking for yields above 5% for a longer period can consider investment-grade corporate bonds or government agency mortgage-backed securities.

Agency mortgage-backed securities (MBS) are part of the residential mortgage-backed securities sector. These debt obligations are created from a pool of mortgages, with their cash flows tied to interest and payments on those loans. Agency MBS are government-backed and issued by agencies like Fannie Mae, Freddie Mac, and Ginnie Mae. Wells Fargo Investment Institute recommends gradually moving money out of cash and into longer-duration assets, such as residential mortgage-backed securities. Luis Alvarado, global fixed-income strategist at Wells Fargo, believes that the RMBS sector is currently attractive compared to investment-grade corporate bonds. UBS also sees value in agency MBS, as interest rate volatility has caused the sector to lag behind corporate bonds. Leslie Falconio, head of taxable fixed-income strategy at UBS, believes that agency MBS are a high-quality asset class that will perform well in the future. With expectations of a soft landing and potential rate cuts from the Federal Reserve, agency MBS are considered a favorable option for investors.

Investors can gain exposure to agency MBS through exchange-traded funds and benefit from their AAA rating and high credit quality. Falconio points out that agency MBS offer a 5.7% yield, making them an attractive investment choice, especially since corporate spreads are tight. UBS America’s chief investment office anticipates that the Federal Reserve will cut rates and remove any possibility of a hike in the near future. This favorable outlook for agency MBS, along with their current value compared to corporate bonds, makes them a promising investment in the current economic environment. The sector is expected to benefit from the Fed’s potential pivot to rate cuts, further enhancing its appeal to investors looking for high-quality assets with attractive yields.

In conclusion, investors are advised to consider moving their money out of cash into longer-duration assets like agency mortgage-backed securities. While short-term yields may be tempting, the risk of lower yields in the future poses a challenge. By investing in agency MBS, investors can secure yields above 5% for a longer period while benefiting from their high credit quality and liquidity. With expectations of rate cuts from the Federal Reserve and the potential for a soft landing in the economy, agency MBS are seen as an attractive option for investors looking to maximize their returns in the current market environment. Consider diversifying your investment portfolio with agency MBS to take advantage of their strong performance potential.