Mortgage & Structured Products Trader Rate sensitivity in focus

Credit Strategy Research 21 August 2026 | 4:28PM EDT

MORTGAGE & STRUCTURED PRODUCTS TRADER

Agency MBS: Varying rate sensitivity across the stack drives coupon selection Arun Manohar | n The surprise announcement of increased Treasury buybacks saw the MBS basis Goldman Sachs & Co. LLC tighten modestly while belly and lower coupons outperformed higher coupons Ben Shumway on Wednesday, although the moves have retraced since rates have drifted higher. | Goldman Sachs & Co. LLC n If the Treasury is successful in capping long-end yields, it would be a positive for Neth Karunamuni the MBS market. If additional announcements can help bring long-end yields | lower, we expect belly coupons (FN 5.0s) to outperform. Alternatively, if 10-year Goldman Sachs & Co. LLC

Treasury yields sell-off beyond 4.8-5.0%, we believe extension concerns and fund outflows would drive higher coupon underperformance. n We recommend returning to neutral on lower coupons (FN 2.0s-2.5s) following outperformance over the past month.

Agency MBS: Consistent foreign fixed income demand from Japanese pension funds n Overseas investors were net buyers of $51 billion in agency securities during 1H’2026, a sharp improvement from a disappointing 2025. The bulk of purchases continues to be driven by hedge fund domiciles and may not reflect true overseas demand. n Japanese trust banks (i.e., pension funds) have been a consistent source of foreign fixed income demand from Japan in recent years, likely driven by rebalancing of their rapidly growing equity allocations. This flow has likely supported the MBS market as well.

RMBS: Elevated rates amplify extension risk concerns n In general, recently issued collateral is more exposed to extension risk compared to 2024-2025 originated deals, as deal GWACs have trended lower over time. Similarly, the 2023 vintage carries low extension risk at current rate levels. n The impact of extension risk is the greatest for the non-QM M1, CES A2 and subordinate tranches, based on the principal waterfall and the foregone deal call. However, spread differentials vs. A1 tranche remains tight as investors may be more focused on yield maximization.

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Goldman Sachs Mortgage & Structured Products Trader

Agency MBS Rate sensitivity back in focus: Treasury buyback helps, but level of yields to drive MBS market performance

Interest rate sensitivity of the MBS basis was in full display this week. The surprise announcement to double the size of long-end Treasury buybacks on Wednesday saw the basis tighten modestly while belly and lower coupons outperformed higher coupons. However, as rates rose on Thursday and Friday, the MBS market experienced some performance retracement. With 10-year Treasury yields staying elevated and close to YTD highs, some market participants appear to be adopting a more cautious stance. In such an environment, we expect the heightened sensitivity to rate moves to persist.

Market focus now shifts to next week’s speech by Chairman Warsh at the Jackson Hole symposium as well as any further announcements from Secretary Bessent. In a CNBC interview on Thursday, Secretary Bessent suggested that the administration could announce “probably (at the) end of the week or start of next an increased focus on fiscal consolidation”.

The ‘increased buyback’ alone may not be sufficient to bring yields lower, as it does not address the underlying drivers of the rate back-up. The steady increase in long-end Treasury yields over the past few months have been driven by a combination of factors including changes to the Fed’s communication style/policy uncertainty leading the market to demand increased term premium, some concerns around Fed credibility as Chairman Warsh may not be as hawkish as initially perceived, growing fiscal deficits, backup in global long-end yields, and elevated IG corporate supply driven by AI-related investments.

If the recent activist approach by the Treasury is successful in capping long-end yields, at least for the near term, it is likely…