Technical tailwind for US investment grade?

February 3, 2026

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Rising demand for agency MBS could compress spreads further, strengthening the relative appeal of US investment grade credit at the margin, argue Ian Horn and Eric Schure.

At the start of 2026, President Donald Trump voiced his support for the purchase of US$200bn of Agency mortgage-backed securities (MBS) by government sponsored entities Fannie Mae and Freddie Mac.¹ While the timeline is unclear, director of the Federal Housing Finance Agency Bill Pulte said that purchases “can be executed very quickly”.¹ This appears to be part of a broader effort to garner support from consumers struggling with affordability on multiple fronts, ahead of the mid-term elections in November.

Prior to their nationalisation in 2008, Fannie Mae and Freddie Mac retained significant exposure to the MBS market. Since then, their retained exposure has been capped, with several amendments resulting in today’s limits of US$225bn each.² However, holdings currently total a much lower US$247bn across both entities, leaving the c.US$200bn of headroom Trump is looking to mobilise.²

Coupled with recent efforts to ban institutional investors from buying single family homes, we believe the US President is clearly targeting affordability in the US housing market. However, he must balance the desire to increase affordability for new buyers while supporting homeowner equity of existing owners. Lower mortgage rates appear to be part of his proposed solution.

Mortgage rates are simplistically driven by two components - underlying Treasury yields, and mortgage spreads over those yields. While Trump has encouraged the Federal Reserve (Fed) to lower policy rates, which could help to bring down Treasury yields, creating demand for MBS products (pools of underlying mortgages)  targets the mortgage spreads over Treasury yields.

The US 30-year mortgage rate has been trending lower since the end of 2023, falling almost 200bps since its peak of 8.1% in late 2023.³ This decline has primarily been driven by tighter mortgage spreads rather than lower Treasury yields - in line with broader spread compression in credit markets.

US credit markets are dominated by two large sub-asset classes - Agency MBS and investment grade - both of which each represent almost US$10tn of assets.⁴ Investors typically compare the relative value between these two large, liquid pools of securities, and any compression of MBS spreads due to increased demand will impact the relative value of US investment grade. Put simply, tighter MBS spreads would likely drive more demand for the wider spreads in the corporate market, even though these are also tight on a historic basis.

To show this crudely, we can plot the current spread in the Agency MBS market versus the US investment grade corporate market. On a relative basis, the spread premium in US investment grade is close to the widest it’s been in the last 2 years. Agency MBS spreads have moved sharply tighter since the start of the year, in reaction to this directive from the US Administration.

In their recent 2026 outlook, Goldman Sachs “expressed an overweight view on agency MBS vs. IG corporates”.⁵ However, “following the sharp tightening in MBS basis, we now recommend being neutral agency MBS vs. corporates”. A further comment states “managers could incrementally allocate a greater share of new inflows to IG corporates over agency MBS”.

A note from Morgan Stanley also supports the view that US investment grade would likely be the beneficiary of any repositioning. The piece highlights “the scale of the purchases … means that not many markets can compete in size. US IG with an outstanding value of US$9.5tr is comparable to the Agency MBS market in size, and second only to the US government bond market”.⁴

This view resonates with us, and we have anecdotally heard of investors starting to react to the recent outperformance in MBS spreads.

In the current spread environment, it is key to identify where spreads continue to look attractive, but also where spreads are least likely to widen due to shifting demand. While US investment grade spreads are historically tight, we increasingly find arguments for spreads in this market to remain compressed. These include the growing MBS basis that could bring another wave of demand for US investment grade credit.

 

References

1.Bloomberg News, 8th January 2026 - Trump Tells Fannie, Freddie to Buy US$200 Billion of Mortgage Debt
2.Wall Street Journal, 8th January 2026 - Trump Calls on Fannie and Freddie to Buy US$200 Billion in Mortgage Bonds
3.Bloomberg, as of 27th January 2026, ILM3NAVG Index
4.Morgan Stanley Research, 16th January 2026 - Read Across from MBS Rally
5.Goldman Sachs Research, 9th January 2026 - Mortgage Notes: MBS purchase announcement: Spread compression likely played out

 

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of February 2026, and may change without notice.

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Index descriptions

ER40 – The ICE BofA BBB Euro Corporate Index is a subset of the ICE BofA Euro Corporate Index (ER00) including all securities rated BBB1 through BBB3, inclusive.

HE10 – The ICE BofA BB Euro High Yield Index is a subset of the ICE BofA Euro High Yield Index (HE00) including all securities rated BB1 through BB3, inclusive.

HE20 – The ICE BofA Single-B Euro High Yield Index is a subset of the ICE BofA Euro High Yield Index (HE00) including all securities rated B1 through B3, inclusive.

ICE BofA Single-A US Corporate Index (C0A3) ICE BofA Single-A US Corporate Index is a subset of ICE BofA US Corporate Index including all securities rated A1 through A3, inclusive.

C0A4 - The ICE BofA  BBB US Corporate Index is a subset of the ICE BofA  US Corporate Index (C0A0) including all securities rated BBB1 through BBB3, inclusive.

J0A1 – The ICE BofA  BB US Cash Pay High Yield Index is a subset of the ICE BofA  US Cash Pay High Yield Index (J0A0) including all securities rated BB1 through BB3, inclusive.

J0A2 – The ICE BofA  Single-B US Cash Pay High Yield Index is a subset of the ICE BofA  US Cash Pay High Yield Index (J0A0) including all securities rated B1 through B3, inclusive.

ICE BofA Single-A US Corporate Index (C0A3) ICE BofA Single-A US Corporate Index is a subset of ICE BofA US Corporate Index including all securities rated A1 through A3, inclusive.

C0A4 - The ICE BofA  BBB US Corporate Index is a subset of the ICE BofA  US Corporate Index (C0A0) including all securities rated BBB1 through BBB3, inclusive.

J0A1 – The ICE BofA  BB US Cash Pay High Yield Index is a subset of the ICE BofA  US Cash Pay High Yield Index (J0A0) including all securities rated BB1 through BB3, inclusive.

J0A2 – The ICE BofA  Single-B US Cash Pay High Yield Index is a subset of the ICE BofA  US Cash Pay High Yield Index (J0A0) including all securities rated B1 through B3, inclusive.

ER30 – ICE BofA Single-A Euro Corporate Index is a subset of ICE BofA Europe Corporate Index including all securities rated A1 through A3, inclusive

ILM3NAVG Index - Bankrate.com US Home Mortgage 30 Year Fixed National Avg

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