We believe the current market environment for securitized credit is attractive. Today’s low mortgage rates and limited housing inventory have contributed to robust home sales and rising prices, while historically high savings rates and low debt servicing costs have bolstered consumer balance sheets. Office re-openings and strong travel activity have further supported a recovery in commercial real estate.
Securitized credit, which involves the packaging of cash flows from different sources including mortgages, credit cards, auto loans and other types of receivables into marketable securities, offers many potential benefits to fixed income investors who are seeking to diversify their traditional unsecured credit risk exposure and source alternative forms of income and total return. Investors may also reap potential benefit from improved underwriting standards over the last decade.
The US securitized market today is approximately $7.5 trillion (source: Bloomberg) in size and is comprised of residential mortgage backed securities (RMBS), asset backed securities (ABS) and commercial mortgage backed securities (CMBS). Residential mortgage credit, which is comprised of legacy RMBS (subprime, Option ARM, Alt-A) Prime, Credit Risk Transfers (CRT) and Jumbo mortgages, historically offers very attractive diversification benefits given it’s low-to-negative correlation with most traditional liquid fixed income assets (see table below).
When compared to most corporate credit portfolios, residential mortgage credit has historically exhibited less downside risk while producing a higher Sharpe ratio. This is particularly true when compared to both investment grade and high yield corporate bonds.
MacKay Shields Global Fixed Income Team’s philosophy of eliminating uncompensated risk while seeking diversified sources of return makes residential mortgage credit an attractive opportunity set. Even diversifying up to 30% of a corporate allocation (comprised of an 80% investment grade, 20% high yield mix), has shown to produce a better risk-return profile.
For more information on MacKay Shields securitized credit capabilities, please reach out to your MacKay Shields contact or John Akkerman.
1. Source: MacKay shields Global Fixed Income Team, Bloomberg, J.P. Morgan. Index return data for the 96 month period ending August 31, 2021. IG Corporate: Bloomberg U.S. Corporate Investment Grade Index; HY Corporate: Bloomberg U.S. Corporate High Yield Index. Residential Mortgage Credit: J.P. Morgan Non-Agency RMBS Credit Index. It is not possible to invest directly into an index. Please see index descriptions at the end of this document. Hypothetical examples, for illustrative purposes only. Based on J.P. Morgan data and asset allocation percentages determined by MacKay Shields Global Fixed Income Team. The hypothetical returns shown above do not represent the returns of any client portfolio or strategy actually managed by MacKay Shields and should not be construed as such. The hypothetical returns shown are index-based; MacKay Shields' portfolios are actively managed and would vary from any applicable or benchmarked index. Therefore, these hypothetical returns are not indicative of investment skill. Actual portfolios would be subject to fees and expenses. No fees or expenses were included in the hypothetical results above. No representation is made as to the accuracy and completeness of information contained in this document that has been obtained from third parties. Please see Hypothetical Performance Disclosure page at the end of this document for important additional information related to hypothetical returns. Past performance is not indicative of future results.
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Past performance is not indicative of future results.
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