May 2023

The Case for Agency Mortgage-Backed Securities

In March 2022, the Federal Reserve embarked on an aggressive tightening campaign to curb inflation
coming out of the COVID-19 pandemic. The first hike, delivered on March 16, 2022, took the federal
funds rate to 0.25%-0.5%; at the time, two-year and 10-year U.S. Treasury yields were 1.9% and 2.2%,
respectively. About 14 months later, the federal funds rate stands at 5%-5.25%, and two-year and
10-year Treasury yields are 4.3% and 3.7%, respectively, thereby flattening over 90 basis points (bps). This has represented some of the most aggressive policy tightening in many decades.