Goldman warns U.S. mortgage bond returns to weaken

(Reuters) – Goldman Sachs (NYSE:) on Tuesday cautioned investors with U.S. mortgage-backed securities holdings face the risk of below average returns in the coming year due to rising bond yields and their current low yield premiums over comparable U.S. Treasuries.

After adjusting for risk, MBS on average have produced 0.35 percentage point more than Treasuries in annual total return since 1998, Goldman Sachs analyst Marty Young said in a research note.

“We expect MBS returns over the next year to be lower than average historical returns, as rising yields will exert a downward drag on bond prices and tight mortgage vs. Treasury spreads will provide lower than average carry potential,” Young wrote.

Goldman is a “neutral” view on agency MBS or those bonds guaranteed by government agencies Fannie Mae (PK:), Freddie Mac (PK:) and Ginnie Mae as the sector and many asset classes would generate below average returns over the next year.

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