In the world of investment opportunities, mortgage-backed securities (MBS) are emerging as an attractive alternative to Treasuries. Sure, they dropped in price along with other fixed-rate bonds as yields rose and inflation spiked, but the outlook is beginning to change. Inflation is falling, the Fed is expected to cut interest rates this year, and the relatively high spreads available to mortgage investors are likely to drop. However, bond investors need to understand that traditional ways of accessing the market, such as passive mortgage ETFs or mutual funds, are not the best way to capture the potential decline in spread. Why? It has to do with a concept known as convexity.
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