Why investors should consider US securitized credit

US securitized credit markets, comprising over US$11 trillion in agency mortgage-backed securities (MBS) and more than US$2 trillion in non-agency securitized credit, represent a significant portion of the US fixed-income universe. These markets offer diverse investment opportunities with varying structures and collateral types, providing benefits such as income diversification and higher yields compared to traditional fixed-income sectors. Currently, the spreads and fundamentals in these markets appear attractive, offering potential for broader portfolio diversification and income enhancement.

Agency MBS, guaranteed by US government agencies like Ginnie Mae, Fannie Mae, and Freddie Mac, offer a yield advantage over US Treasuries, compensating for prepayment risk while eliminating credit risk. This makes them a compelling option given the current low level of mortgage refinancing activity. Additionally, the conservative lending standards post-2008 financial crisis have enhanced the quality of US securitized credit, supported by economic growth, low unemployment, and strong consumer balance sheets.

US securitized credit provides portfolio diversification benefits due to its low correlation with other fixed-income sectors, offering lower volatility and potential for higher risk-adjusted returns. Agency MBS investors trade credit risk for prepayment and interest-rate volatility exposure, while non-agency sectors are supported by collateral backing and credit enhancements, making them structurally robust compared to corporate bonds.

The broad and diverse US securitized credit universe allows for active sector rotation and security selection, with opportunities across agency MBS, non-agency RMBS, CMBS, and ABS. The absence of passive ETF options in this space encourages investors to engage with active managers who prioritize collateral and structural research. Active management strategies can adapt to varying interest rate environments, emphasizing floating-rate securities in rising-rate scenarios or fixed-rate agency MBS resilience in lower-rate contexts, aiming for higher risk-adjusted returns.