Could the lower rates trigger a shift in investor positioning between mortgage‑backed securities and other fixed‑income assets, and how should the portfolio be re‑balanced?

Market dynamics – The 30‑year fixed‑rate mortgage at 6.50% is now well‑below the 7‑8% corridor that has dominated the U.S. fixed‑income market for the past 12‑18 months. A single‑digit rate puts the yield on Agency‐MBS (e.g., Freddie‑ and Fannie‑backed) under pressure: price appreciation for existing MBS slows, spreads to Treasuries widen and the duration premium that dealers have been pocketing contracts away. Simultaneously, the lower‑rate outlook improves the relative value of new‑issue agency MBS because cash‑flow pre‑payment risk falls (home‑buyers can afford larger loans, refinancing demand stays muted). In the broader fixed‑income universe, high‑quality corporate bonds and Treasury “flight‑to‑quality” still offer tighter spreads, while “core‑plus” and high‑yield credit retain their spread premium as a hedge against a potential slowdown in housing activity.

Portfolio implication & re‑balance – 1) Trim exposure to existing agency MBS positioned for steep price gains – cut back on older, higher‑coupon tranches whose yield now sits above the market curve; replace them with short‑duration, front‑end agency MBS (e.g., 1–3 year WALA or CNTR strips) that benefit from lower pre‑payment volatility. 2) Reallocate the freed capital into assets with tighter risk‑reward – increase allocation to U.S. Treasuries (5‑10 yr) and investment‑grade corporates whose spreads are compressing but still deliver superior risk‑adjusted return versus over‑priced MBS. 3) Add a modest hedge – consider a US‑MBS total‑return swap or SFR REO‑linked ETF to capture any upside if the housing market rebounds and pre‑payments surge when rates dip further. The net effect is a more balanced fixed‑income profile: shorter, lower‑duration MBS for rate‑sensitivity, higher‑quality government and corporate exposure for carry, and a small tactical hedge to capture a potential rebound in mortgage‑backed cash flows.