What happened in September
Mortgage bond funds were under heavy pressure. Investors pulled money at the fastest rate in over six years, and ETFs that hold US mortgage-backed securities saw net redemptions totaling $2.4 billion during September, the biggest since March 2020. BlackRock's iShares MBS ETF, or MBB, posted a total return decline of roughly 3% for the month, trailing an ETF that tracks the broader US bond market, which fell 2.4%.
The withdrawals were widespread. MBB logged roughly $2.7 billion exiting the fund in September, marking its largest monthly decline since inception. Investors also stepped back from the Simplify MBS ETF and the Schwab Mortgage-Backed Securities ETF, which saw outflows of $342 million and $245.8 million, respectively, both the largest they have ever recorded.
Why the selling picked up
Treasury yields climbed to multi-decade highs as markets anticipated that the Federal Reserve would hike interest rates to tackle inflation. That move, plus a recent jump in bond market volatility that now sits near April highs, is a tough mix for mortgage-backed securities. These bonds can struggle when yields move sharply because prepayment patterns change and investors can get stuck holding lower coupons for longer when refinancing slows.
Where the money went
Not every dollar leaving MBB reflected a bearish view. BlackRock's model allocation team sold over $1 billion of the passively managed MBB and redirected that capital into a BlackRock actively managed MBS ETF, which drew about $560 million of inflows in September.
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What this means for your money
When rates jump and volatility heats up, simpler bonds can look more appealing than complex mortgage-backed paper, and performance gaps can widen quickly. September's moves show how money can rotate even within the same slice of fixed income, including from index to active approaches, as investors weigh yield, complexity and rate risk.
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