Stability. It’s what the vast bulk of fixed-income investors crave when they build their bond portfolios. After all, the point of most bonds is to provide a steady coupon payment in exchange for lending some entity money. But lately, some of that stability is being tested in some of the most traditionally stable fixed-income asset classes.
Treasury bonds aren’t what they used to be.
However, that doesn’t mean bond investors can’t still maintain stability while the Treasury market is acting erratically. According to investment giant and bond specialist PIMCO, looking elsewhere within the high-quality fixed income universe could provide stronger yields and less volatility. Points that fixed-income seekers are craving these days.
A Mixed Backdrop
It’s safe to say that the world is undergoing a period of geopolitical uncertainty. Chief among these could be the idea that U.S. exceptionalism is starting to fail. That idea is beginning to put pressure on U.S. government debt.
IOUs issued by Uncle Sam are supposed to be the bedrock of the bond market, offering a calm port in a storm when things get dicey. But lately, that hasn’t been the case. The yield on the benchmark 10-year has been all over the place. This has reflected a myriad of issues and policy uncertainty plaguing the safety of treasuries.
The Trump administration’s tariff plans have begun to affect the pricing of goods within the United States. That inflation has created an issue for the Federal Reserve and its path to lower interest rates. While the central bank did cut rates at its last meeting, inflation recently hit a seven-month high and continues to rise. This has continued to make treasury bonds a volatile choice.
Similarly, the financial stability of the treasury and the U.S. government has become a factor. Many of the provisions in the recently passed One Big Beautiful Bill Act (OBBBA) are expected to further increase deficits. Excluding the effects of any tariff revenue, the Congressional Budget Office now estimates that the OBBBA tax breaks, coupled with spending increases, will increase the budget deficit by more than $3 trillion over the next 10 years. Analysts at PIMCO predict that even if the U.S. economy continues to expand, annual deficits will occur in the 5% to 7% range. 1
As you can see from the chart provided by the asset manager, the U.S. is on track to have debt equal to 2 times its GDP by 2040.
Source: PIMCO
That deficit is a concern regarding the health of the U.S. Treasury market. And we’ve already seen higher and higher yields as a result.
Other “High Quality” Bonds
With continued uncertainty growing about U.S. Treasuries, bond investors seeking safety for their portfolios may feel left out. The only free lunch in town is no longer available. But according to PIMCO, that might not be the case. There are ways to get stability into a fixed income portfolio by focusing on other so-called high-quality bonds.
Treasuries do make up the lion’s share of the benchmark Bloomberg Barclays U.S. Aggregate Bond Index. But they are not the only piece. In fact, there are over 10,000 different investment-grade bonds within the benchmark. One of the most exciting and most significant at over $10 trillion, according to PIMCO, remains agency mortgage-backed securities (MBS).
MBS are pools of mortgages tied to homes or commercial properties. Banks and other lenders issue mortgages, which are then packaged and sold to investors. The cash flows from the underlying mortgage properties form the basis of the coupons and repayments. The high credit quality of MBS comes from its backing. The government trio of Freddie Mac, Fannie Mae, and Ginnie Mae is three of the largest buyers/packagers of mortgage loans.
The wonderful thing is that Freddie Mac and Fannie Mae are government-sponsored enterprises, while Ginnie Mae is government-backed. These agencies provide a layer of safety for the MBS, and in the case of Ginnie Mae, 100% backing in the event of default.
As a result, these bonds have very high credit quality. In many cases, they are just under Treasury bonds. However, due to pre-payment risk, as people can and do pay off their homes early, as well as some foreclosure risks, MBS yield more than similar Treasury bonds. According to PIMCO, the yield advantage and current high starting yield of the sector —around 4.65% —is what can help MBS find stability in the current unstable environment. 2
PIMCO finds that starting yields have historically been a great predictor of forward returns. With yields higher than those of Treasuries, this gives MBS an advantage in terms of better returns over time. Moreover, the higher yield provides a cushion in the event of a drawdown. Investors can receive a higher cash return to help smooth out the total returns for their portfolios. Additionally, these mortgage-backed bonds have historically provided smoother returns than other high-quality bonds- such as investment-grade corporate bonds- during economic downturns. Investors are compensated for risks through a strong yield, so they tend not to sell and instead hold on.
With mortgage-backed securities, investors can realize lower volatility, increase their portfolio’s yield and return potential, while maintaining very high credit quality. That provides a level of stability to their core that Treasury bonds are not currently offering.
Following PIMCO’s Advice
With plenty of risk on the table facing bread-and-butter treasuries, it may be time to look towards other high-quality bonds in a fixed income portfolio for a strong core. Mortgage-backed securities sponsored by the various government agencies could be the answer. PIMCO suggests that overweighting these bonds could be what investors are looking for these days.
Getting exposure is very easy, at least when it comes to funds and ETFS.
There are numerous pure-play MBS ETFs on the market these days —both active and passive —that can provide exposure to agency MBS bonds. Quickly using one of these funds can add exposure and help overweight a position in the Agg.
Another idea could be so-called core-plus funds. These actively managed ETFs delve into the Agg and examine its other sectors beyond treasury bonds to find the optimal combination of yield and duration. Many of them are overweight MBS and corporate bonds versus treasuries.
Mortgage-backed Securities (MBS) ETFs
These funds are selected based on their ability to tap into MBS at a low cost. They are sorted by their YTD total return, which ranges from 3.2% to 5.4%. Their expense ratio ranges from 0.04% to 0.66%, and their yields range between 3.23% and 4.31%. Their AUM ranges from $290M to $26B.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| LMBS | First Trust Low Duration Opportunities ETF | $4B | 5.4% | 3.82% | 0.66% | ETF | Yes |
| JMBS | Janus Henderson Mortgage-Backed Securities ETF | $1.9B | 4.6% | 4.31% | 0.28% | ETF | Yes |
| GNMA | iShares GNMA Bond ETF | $290M | 4.5% | 3.39% | 0.11% | ETF | No |
| MBB | iShares MBS ETF | $25.9B | 4% | 3.38% | 0.05% | ETF | No |
| VMBS | Vanguard Mortgage-Backed Securities ETF | $17.4B | 3.5% | 3.25% | 0.04% | ETF | No |
| SPMB | SPDR Portfolio Mortgage Backed Bond ETF | $4.3B | 3.2% | 3.23% | 0.05% | ETF | No |
Core-Plus ETFs
These ETFs were selected based on their low-cost exposure to active bond management within the unconstrained, dynamic, and core-plus sectors. They are sorted by their YTD total return, which ranges from -1.2% to 2.8%. They have expenses ranging from 0.10% to 0.71% and assets ranging from $63 million to $ 18.1 billion. They currently yield between 4.2% and 5.3%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| JCPB | JPMorgan Core Plus Bond ETF | $5.78B | 2.8% | 5.3% | 0.40% | ETF | Yes |
| BOND | PIMCO Active Bond ETF | $5.5B | 2.5% | 5.3% | 0.71% | ETF | Yes |
| VPLS | Vanguard Core Plus Bond ETF | $138M | 2.5% | 4.8% | 0.2% | ETF | Yes |
| TOTL | SPDR DoubleLine Total Return Tactical ETF | $3.5B | 2.3% | 5.1% | 0.55% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $18.1B | 2.2% | 5% | 0.36% | ETF | Yes |
| AVIG | Avantis Core Fixed Income ETF | $1B | 2.2% | 5% | 0.15% | ETF | Yes |
| CGCP | Capital Group Core Plus Income ETF | $4.5B | 1.8% | 4.8% | 0.34% | ETF | Yes |
| VCRB | Vanguard Core Bond ETF | $63M | -1.2% | 4.2% | 0.10% | ETF | Yes |
Overall, stability can still be found by fixed-income seekers. The key is to look elsewhere within the high-quality body universe. According to PIMCO, the answer can be found in mortgage-backed securities and agency bonds. Offering high yields and firm credit profiles, they can serve as a replacement for treasuries amid uncertainty.
Bottom Line
Various issues have continued to make treasury bonds a volatile and now riskier choice for portfolios. Getting quality and stability in a bond portfolio isn’t out of the question, however. According to PIMCO, MBS could be the answer with their high yields and credit quality.
1 PIMCO (August 2025). Income Fund Update: Seeking Stability With High Quality Fixed Income
2 PIMCO (July 2025). The Fragmentation Era
