What is a key characteristic of mortgage-backed bonds?

Mortgage-backed bonds, or more commonly known as mortgage-backed securities (MBS), are indeed a unique financial instrument within the realm of fixed income. One key characteristic of these securities is that they remain on issuers' balance sheets but are often segregated from other assets to provide clarity and transparency regarding the cash flows generated from the mortgage pools backing the securities.

When mortgages are pooled and securities are issued against those pools, the underlying mortgage loans are typically held by a financial institution, such as a bank or a mortgage company. While the loans are still considered assets on the issuer's balance sheet, the issuance of MBS allows investors to participate in the mortgage market without taking direct ownership of individual mortgages. Segregating these assets reflects the specific set of cash flows generated from homeowners' mortgage payments, separating them from other lending activities and liabilities.

This segregation helps in risk assessment and management, as it allows investors and regulators to analyze the performance of the mortgage-backed instruments based solely on mortgage performance, independent of the other assets and risks on the issuer’s balance sheet.