Gilbert Garcia on Why Now is a Great Time for U.S. Treasurys and MBS

Attractive Yields in Fixed Income

• 💡 Gilbert Garcia believes now is an excellent time to buy and add duration across the yield curve in U.S. Treasurys.
• 🎯 The recent pause in U.S.-China tensions is seen as an opportunity to reload on Treasury positions.
• ⚠️ Garcia suggests it's hard to imagine rates moving significantly higher due to observed weakness in housing and commercial real estate.

Corporate Bonds Offer Little Opportunity

• 📉 Investment grade corporate bonds are only about 15 basis points wider year-to-date, significantly overvalued compared to historical averages.
• ⚠️ Similarly, high-yield corporate bonds are about 50 basis points wider but still 200 basis points from their averages, indicating limited opportunity.
• 🔑 The recommendation is to focus on higher quality assets like U.S. Treasurys.

Mortgage-Backed Securities Value

• 🚀 Agency guaranteed mortgage-backed securities (MBS) are highlighted for their attractive dollar prices and positive convexity, meaning prepayments are beneficial.
• 📊 Despite low coupons from the COVID era, factors like relocation, death, divorce, and bankruptcy continue to drive prepayments at 4-6%.
• 📈 At current dollar prices in the low 80s, MBS offer yields of about 100 basis points over Treasurys, presenting extraordinary value for money managers.

Municipal Bonds and Retail Investor Shifts

• 💰 Taxable municipal bonds have paralleled corporate bonds and performed well; a shift into tax-exempt municipal bonds is recommended to take advantage of tax-exempt coupon payments.
• 🎯 The intermediate part of the muni curve (4-7 years), especially the 5-year maturity, is considered the sweet spot.
• 📈 Investors are moving from stocks to bonds to capitalize on higher yields and reduced stock market risk.
• ⚡ There's a notable increase in searches for bond new money management assignments across the curve.