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I just checked, VMBS (Vanguard MBS) has yield of 3.73%, but VGLT (Vanguard government long term bond) has yield of 5.08%. I thought MBS is riskier and would require higher YTM by the market.

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If you opened a mortgage today, yes it would have a higher rate than treasuries of the same tenor (e.g. 30y). However, the MBSs that are owned by the ETFs contain mortgages that were originated over the past several years, when rates were 3-4%.

As new mortgages originate, are packaged into new MBSs, and bought by the fund, the YTM of the ETF should go up.

Note that MBSs, let alone MBS ETFs, are NOT guaranteed income. Yes, the interest from the mortgages should be stable, but the MBSs (and hence the ETF) can lose value if interest rates rise or if a significant number of mortgages default or are repaid earlier than expected.

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  • I understand the "coupon" of MBS has been pre-determined when the mortgages are issued. However, VMBS is an ETF being actively traded, I would imagine the price of VMBS to drop, i.e., traded in discount, just like VGLT. I am still confused why the YTM of VMBS dit not very quickly go up to the current market rates?
    – ZEWEI CHU
    Oct 28 at 18:51
  • Why "very quickly"? There's an averaging effect as loans mature out an other are brought in. For N-year loans, that means N years to completely turn over. Meanwhile rates are moving back and forth, and the combined yield is averaged over the past N years. So its inherent yield will lag behind current changes, which can be good or bad, and people value the fund based on what they expect future motion to be before they sell.
    – keshlam
    Oct 29 at 14:47
  • when you say “inherent yield”, do you mean YTM? i.e., the yield indicated/computed by the future cashflow and current value(price)?
    – ZEWEI CHU
    Oct 29 at 19:55
  • @ZEWEICHU That is not what the "YTM" of the ETF is. The dividend of an ETF is not fixed and does change with market rates - it is passing though the interest/gains of the MBSs it contains, which pass through the interest/payments of the mortgages it contains.
    – D Stanley
    Oct 30 at 12:55
  • "Tenor"? Is this the right word here? Is it some kind of a metaphor to say that treasuries are of certain tenor?
    – void_ptr
    Oct 30 at 19:01

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