MBS is an attractive asset type when comparied with the U.S. Treasury for the following reasons:
1. The U.S. Mortgage-Backed Securities market is very liquid and expanding while the U.S. Treasury market has shrunk as a percentage of the U.S. dollar-denominated fixed income market.
2. MBS offers significant yield spread to U.S. Treasury for its holders, due to its complexity and uncertainty of their cash flows (e.g. prepayment risk).
3. MBS in general has US govt level security. They are explicitly guaranteed by the Treasury (as is the case with GNMAs) or by the two Government Sponsored Entities (FNMA and FHLMC)。
From what I heard over the past couple of years, China is indeed getting into the MBS market, but to what extent, I don't have any specific number.
My gut is it is very limited compared with China's US Treasury holdings.
