Agency MBS—From Tactical Opportunity to Strategic Allocation

In our last blog, Agency MBS Offer a Compelling Current Opportunity for Reserve Managers, we explained why we believe agency mortgage-backed securities (MBS) present a compelling near-term tactical opportunity given that yields are near 23-year highs with historically low prepayment risk. Many central bank reserve managers are now asking a longer-term question about the merits of having a strategic allocation to agency MBS in investment management benchmarks through the market cycle.

As of June 2026, the Norges Bank suggested a strategic allocation of 12.8% to US agency MBS (in the context of a Global Bond Aggregate Index framework). In April 2026, in a study of portfolio optimizations for central bank reserve management, the Franklin Templeton Institute derived a 15% strategic asset allocation to US agency MBS.

Our research is in collaboration with the Quantitative Insurance Solutions team at Franklin Templeton Investment Solutions (FTIS), which also found benefits to having US agency MBS as a strategic allocation. Historically, agency MBS has delivered higher risk-adjusted returns when combined with global Treasuries (US Dollar [USD]-hedged), an attractive forward-looking yield-for-risk profile compared to similar allocations to high-quality corporate credit and broader portfolio resilience over stressed market cycles.

In our historical simulations, we found that diversifying central bank portfolios with the inclusion of agency MBS as a complement to global Treasuries improved risk-adjusted returns. When shifting a global Treasury bonds Aa (USD-hedged) benchmark toward agency MBS, the combination increased returns and lowered volatility. As shown in Exhibit 1, over a full market cycle spanning the past 25 years, a 50%/50% benchmark of global Treasuries and agency MBS delivered greater annualized returns: 2.99% vs. 2.85% and reduced annualized volatility from 4.55% to 3.93%. Comparatively, a similar shift into US investment-grade corporate Aa bonds raised annualized returns to 3.12% but also increased annualized volatility to 4.76%. Agency MBS was the only complement that optimized the risk-return profile on both dimensions, supporting our case for strategic allocations to agency MBS.

Our proprietary Client Solutions Toolkit captured a similar pattern of expected returns and volatility. As shown in Exhibit 2, a 50% allocation to agency MBS lifted the benchmark expected yield to 5.39%, matching the 5.37% available from an equivalent corporate Aa allocation but with lower ex-ante volatility (4.86% vs. 4.93%), lower interest-rate duration risk (5.8 years vs. 6.7 years) and lower spread-duration risk (2.8 years vs. 3.8 years).

Exhibit 3 highlights the resilience case and broader portfolio diversification of agency MBS during market stress events. Benchmarks with blended agency MBS allocations generally outperformed both pure Treasuries and those blended with corporate credit, reflecting the absence of credit cycle exposure. The pattern is selective: agency MBS outperformed during credit and liquidity crises, corporate credit outperformed in more idiosyncratic events, while Treasuries alone outperformed during interest-rate volatility episodes like the 2013 Taper Tantrum.