The buyers of mortgage-backed securities fall into a short list of large institutional categories: the Federal Reserve, commercial banks and credit unions, pension funds and insurance companies, mutual funds and exchange-traded funds, foreign central banks and sovereign wealth funds, and, in the non-agency corner of the market, hedge funds and specialized fixed-income managers. The agency MBS market alone holds roughly $9 trillion in outstanding securities, which makes it one of the deepest fixed-income markets in the world and explains why so many different kinds of institutions compete for the paper.
Individual retail investors are mostly absent from the direct buyer list. New Ginnie Mae securities carry a $25,000 minimum denomination, and modeling prepayment behavior on an individual pool is specialist work. Retail money reaches this market almost entirely through funds.
The Federal Reserve
The Federal Reserve is one of the single largest holders of agency MBS. As of early March 2026, the central bank held roughly $2 trillion in agency securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.1Federal Reserve Bank of New York. System Open Market Account Holdings of Domestic Securities The purchases are executed by the Open Market Trading Desk at the Federal Reserve Bank of New York under direction from the Federal Open Market Committee.2Federal Reserve Board. Open Market Operations
Most of this position was built through quantitative easing after the 2008 crisis and again during the pandemic, when the Fed bought MBS in bulk to push long-term rates down. Beginning in 2022 the Fed reversed course and let the portfolio run off. That runoff concluded on December 1, 2025, and the Fed has since shifted to reserve management purchases focused on Treasuries.3Board of Governors of the Federal Reserve System. The Central Bank Balance-Sheet Trilemma The remaining MBS will keep declining as the underlying loans pay down, but the Fed is no longer actively shedding them on a schedule. When the central bank owns a large share of the market, less supply reaches private investors and mortgage rates tend to compress; as its share falls, private buyers absorb more new issuance.
Commercial Banks and Credit Unions
Depository institutions are the steadiest private buyers of agency MBS because the securities simultaneously generate yield and satisfy bank regulators. Under the Basel III liquidity coverage ratio, banks must hold enough high-quality liquid assets to survive 30 days of stress. Ginnie Mae securities, carrying the full faith and credit of the United States, qualify as Level 1 assets at full value. Fannie Mae and Freddie Mac MBS qualify as Level 2A, counted at 85 percent of market value.
The capital math is just as attractive. Under federal risk-weighting rules, Ginnie Mae pass-throughs can receive a zero percent risk weight, so a bank holds no capital against them. Fannie and Freddie securities receive a 20 percent risk weight, well below the weighting on whole loans or corporate debt.4Federal Deposit Insurance Corporation. Part II – Risk-Weighted Assets A $100 million position in Freddie Mac MBS ties up far less regulatory capital than the same dollar amount in unsecuritized mortgages. That difference drives enormous institutional demand.
Operationally, MBS also fit how banks run. Mortgages pay principal and interest monthly, giving banks a predictable cash flow stream to meet depositor withdrawals. Banks pledge MBS as collateral for short-term borrowing in the repo market when they need immediate liquidity. The combination of favorable regulatory treatment, steady cash flows, and collateral value makes agency MBS a core holding at nearly every major depository institution.
Pension Funds and Insurance Companies
Pension funds and life insurers buy MBS because their obligations stretch decades forward. A pension plan paying benefits over the next 30 years needs long-duration, predictable assets to match those liabilities, and agency MBS fit that profile. Many of these buyers also operate under the Employee Retirement Income Security Act, which requires fiduciaries to invest with the prudence of a knowledgeable investor saving for their own retirement.5U.S. Department of Labor. FAQs about Retirement Plans and ERISA Agency MBS, with their government-related guarantees, comfortably meet that standard.
Insurance companies face capital requirements set by state regulators through the National Association of Insurance Commissioners’ risk-based capital framework. Highly rated agency MBS carry lower capital charges than corporate bonds of similar yield, which makes them efficient on a capital basis. The scheduled payment structure also helps insurers model cash flows against projected claims.
Pension funds and insurers typically occupy the middle ground of the MBS market: heavy in agency paper, with smaller allocations to highly rated tranches of private-label deals where the yield pickup is worth the additional underwriting work.
Mutual Funds and ETFs
Individual investors reach the MBS market mainly through bond mutual funds and exchange-traded funds that specialize in mortgage debt. The fund manager handles pool selection, prepayment modeling, and trading; the shareholder owns a slice of a diversified portfolio. Fund flows represent a substantial source of demand for agency MBS, and daily inflows and outflows can move prices in real time.
Foreign Central Banks and Sovereign Wealth Funds
International buyers have long been significant participants, drawn by dollar denomination, deep liquidity, and government-related guarantees. Foreign central banks buy agency MBS to diversify foreign exchange reserves beyond U.S. Treasuries. The securities offer a modest yield premium over Treasuries while preserving high credit quality, which appeals to reserve managers whose primary job is capital preservation.
Sovereign wealth funds, managing surplus national wealth for countries with trade surpluses or commodity revenues, allocate portions of their portfolios to American mortgage debt in search of stable, long-term returns in the world’s primary reserve currency. Foreign private banks and investment firms participate for diversification and for U.S. real estate exposure without owning physical property. Because agency MBS are standardized, a buyer in Tokyo or London can evaluate them with the same prepayment models and credit assumptions as a domestic investor. That global participation deepens liquidity and helps keep borrowing costs lower for American homeowners than they would be if only domestic money were in the market.
Hedge Funds and Specialized Private-Label Buyers
Not every mortgage-backed security carries a government or GSE guarantee. Private-label securities, also called non-agency MBS, are issued by banks and other private entities and backed by loans that fall outside conforming standards: jumbo mortgages, loans to self-employed borrowers with non-traditional documentation, or loans to real estate investors. As of the third quarter of 2025, private-label securities accounted for about $0.5 trillion of the roughly $14.6 trillion U.S. residential mortgage market, and private-label securitization represented approximately 6.8 percent of new originations.6Ginnie Mae. Global Markets Analysis Report
The buyer base here skews toward investors willing to take on credit risk for higher yields. Hedge funds and specialized fixed-income managers are the most active participants. Without a government guarantee, they underwrite the underlying loan quality, borrower creditworthiness, and structural protections like subordination and credit enhancement within each deal. The reward is a yield premium: top-rated non-agency MBS have recently traded at roughly 15 to 30 basis points above comparable agency securities. Insurance companies and pension funds also hold highly rated private-label tranches, generally in smaller allocations than their agency positions.
What Buyers Weigh Before Purchasing
Different investor types gravitate to different parts of the MBS market because the risks are not evenly distributed.
- Prepayment risk. When rates fall, homeowners refinance and principal returns faster than expected. Investors then reinvest at lower prevailing rates, reducing effective yield.
- Extension risk. When rates rise, refinancing slows and principal comes back more slowly than anticipated, leaving the investor holding a below-market asset for longer. During the Fed’s 2022-2023 rate hikes, agency MBS durations stretched significantly as prepayments dried up.
- Interest rate risk. MBS prices move inversely with rates, but prepayment behavior makes duration unstable. A 120-basis-point rate decline can cut the duration of the agency MBS universe nearly in half, while rate increases extend it. That negative convexity means MBS tend to underperform when rates move sharply in either direction.
- Credit risk. For agency MBS, credit risk is minimal because the GSE guarantee or Ginnie Mae’s full faith and credit backing absorbs borrower defaults. For private-label securities, credit risk is real; the wave of defaults on subprime and Alt-A loans in 2007-2008 showed how quickly non-agency MBS can lose value when borrowers cannot pay.
These differences explain the sorting. Banks and central banks overwhelmingly hold agency securities, where credit risk is negligible and regulatory treatment is favorable. Hedge funds and specialized managers venture into private-label deals where the risk is higher but the compensation is better. Pension funds and insurers sit between the two, anchored in agency paper with selective exposure to highly rated private-label tranches.