(Bloomberg) — Demand for corporate bonds could get a boost from a surprising source in the coming months: investors taking profits on US mortgage bond holdings who need another asset to buy instead.

Mortgage-backed securities have notched big gains this year of 0.45% through Thursday, outpacing most other forms of debt, after US President Donald Trump said that he’s demanding that Fannie Mae and Freddie Mac buy another $200 billion of the bonds. Risk premiums on MBS currently being produced have narrowed about 0.15 percentage point over that time, reaching their tightest level since 2022.

That comes after a great run for mortgage bonds in 2025, with total returns of 8.6%, the highest since 2002. Money managers including Allspring Global Investments and some Wall Street strategists are wondering if the tide will soon head the other way.

“We think these tight valuations in MBS will prompt a sizable rotation out of MBS and into competing products — obviously Treasuries given the lack of spread, but also back into corporate bonds,” wrote Hans Mikkelsen, credit strategist at TD Securities Inc., in a Jan. 13 note.

It’s early days for any kind of a shift. For much of last year, money managers were making the opposite move, looking at using MBS as a place to hide from high valuations in corporate bonds. Big firms like Vanguard Capital Management LLC and TCW Group Inc. have said they are still partial to mortgage bonds, as spreads on corporate notes globally have reached their tightest levels since 2007. The yield premium for corporate credit risk is still extremely narrow or inverted relative to agency MBS, said Peter Van Gelderen, TCW’s co-head of global securitized products.

While valuations in the most liquid, generic parts of the MBS market are tight, for sophisticated active managers, some of the more esoteric market segments still offer attractive value, points out Brian Quigley, head of MBS and senior portfolio manager at Vanguard.

This year could also see record sales of high-grade US corporate bonds, in part to help fund infrastructure for artificial intelligence.

But the comparative value may be shifting after the recent rally in mortgage bonds. Spreads on recently printed MBS are now much closer to risk premiums on higher-quality, intermediate-duration corporate bonds — the gap between the two sets of spreads has reached the lowest in about four years, according to Bloomberg-compiled data.

“The most recent MBS outperformance on Trump’s directive has reduced the relative attractiveness of the sector,” said Maulik Bhansali, senior portfolio manager and co-head of the core fixed income team at Allspring, who has modestly reduced his MBS position but remains overweight.

Morgan Stanley this week lowered its view on mortgage bonds to neutral from positive, citing valuations. There are still reasons to like the securities, including potentially even more demand for Fannie Mae and Freddie Mac, and the likelihood that banks will face regulatory incentives to buy more of the bonds. On the other hand, geopolitical concerns or policies that create more supply of mortgage bonds could weigh on returns, strategists Jay Bacow, Zuri Zhao and Janie Xue wrote in a note on Jan. 13.

Meanwhile, there are reasons to be bullish on credit even amid high valuations. Although corporate issuance will probably rise this year, US Treasury note and bond sales will likely fall sharply, meaning total fixed-rate bond sales could be about flat, according to Barclays strategists. Investors may well move some money out of Treasuries and into company debt.

Global economic growth is still solid, with the World Bank this week having boosted its forecast for growth this year to 2.6% from 2.4%. That’s a touch slower than the estimated 2.7% growth for 2025, but still reflects resilience, according to the lender.

With mortgage bonds having gained so much in recent weeks, the upside may be limited there, said Marc Bushallow, managing director of fixed income at money manager Manning & Napier Advisors LLC. His firm has been cutting exposure to mortgage bonds for a few months.

“There are other places where you can find better returns now,” Bushallow said.

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