With the probability of Federal Reserve rate hikes increasing, the conditions for mortgage-backed securities (MBS) have turned favorable, according to Stifel. The recent repricing of the U.S. Treasury yield curve, which now reflects a mildly bearish flattening pattern, is expected to reduce prepayment speeds, creating a more supportive backdrop for the asset class.

Strategist Kevin Kavin noted in a Wednesday research report that despite the year-to-date narrowing of spreads, MBS still offer a compelling yield and carry advantage relative to Treasuries. “Although spreads have tightened since the start of the year, the income and yield potential of mortgage-backed securities remains robust when compared to government bonds,” he wrote.

The tightening of spreads across various 30-year MBS tranches is attributed to reduced premium risk, limited net supply, and a slowdown in prepayment activity. These factors collectively contribute to a more stable pricing environment for the sector.