Building a bond portfolio these days isn’t easy. Interest rates have been volatile. Credit spreads are tight. And sweeping change in US fiscal, trade, and regulatory policy is underway. We think securitized assets deserve a closer look.
Mortgages and other securitized bonds may help to diversify portfolios that include a healthy mix of interest-rate and credit risk. They may also make it easier to capitalize on the policy and regulatory changes on the Trump administration’s to-do list.
Attractive—and Less Correlated—Return Potential
The short-duration nature of select mortgage debt and collateralized loan obligations (CLOs) may help to reduce correlation to other fixed-income assets, including government and investment-grade corporate debt.
This is important, because while the Federal Reserve seems likely to reduce rates again in 2025, we think the pace of easing may be slower and more uneven than might have been expected a few months ago—and rates may settle at a higher level than we’ve seen in recent cycles.
The Fed’s reticence is understandable: recent history has left policymakers and markets sensitive to any sign of rising prices. And some economists worry that lower marginal tax rates, tariffs and reduced immigration—all priorities of the new administration—could increase growth and push prices higher.
Average yields on select securitized assets are competitive with those on high-yield corporates, while their duration may be shorter. And residential mortgages in particular are exposed to US consumers at a time when household balance sheets are strong. Corporate fundamentals, while still solid, are starting to weaken.
What’s more, various types of mortgage-backed debt, including agency mortgage pass-through securities as well as credit risk transfer securities (CRTs) issued but not guaranteed by US government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, have exhibited low correlation with high-yield corporate bonds (Display, left). Meanwhile, a blend of securitized assets has also exhibited low correlation to US government debt and investment-grade corporate securities (Display, right).