The objective of this paper is to explore the US mortgage-backed securities (MBS) market from the perspective of a foreign investor. We pay particular attention to the US Agency MBS segment, owing to its size, liquidity, return and risk characteristics.

First, we focus on the key defining feature of MBS, prepayment optionality, and what it means for investors. Second, we review other important characteristics of US Agency MBS, including their performance versus other asset classes, and the role MBS can play in the construction of fixed-income and multi-asset portfolios.

Third, we examine the ownership structure of US Agency MBS to assess the role of foreign investors in this market, its evolution and current trends. Finally, we seek to explain why foreign investors hold a relatively small share of US Agency MBS market (15%) compared to domestic investors.