As most government-backed MBS carry the highest credit ratings, what are the benefits of investing in those private-label MBS with lower credit qualities?
First of all, not all government-backed MBS carry the highest credit ratings in the market. Every government or country carries different credit ratings as well as sovereignty risks in respect to foreign reserve, budgetary and treasury debt status, trade surplus or deficit, political stability, economic development and market efficiency, tax and tariff regulations, and strength of the currency. There are privately issued MBS that carry the highest credit rating of AAA from accredited credit rating agencies. It is important to look into the areas of quality of the underlying assets, guarantees and redemption features, and other investment options available to bondholders. Needless to say, those quality bonds which carry the highest credit rating tend to have less risk but bear lower return to investment.
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