Active Management, Uncertainty May Amplify Opportunities for Securitized Assets

Jul 18, 2025

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Mortgage-backed securities and securitized assets remain one of our highest conviction investment ideas across our multi-sector fixed income portfolios. Here are some areas where we are finding value, along with some potential risks.”

Buoyed by attractive starting yields and the expectation of lower interest rates, fixed income markets are performing well in 2025, delivering coupon-plus returns across many sectors. The Bloomberg U.S. Aggregate Bond Index (the Agg) is up more than 3.5% year to date (YTD), while many have fared even better. Moreover, not only do securitized markets offer higher yields today versus their longer-term averages, but each of the four major segments of the market offer a visible yield pickup versus the Agg.

Fixed income sector yields

DISPLAY 1

Past performance is no guarantee of future results.

Source: Bloomberg. As of 6/30/25. Agg represented by the Bloomberg US Aggregate Bond Index. ABS represented by the ICE BofA US Fixed-Rate ABS Index. Commercial mortgage-backed securities (CMBS) represented by the ICE BofA US Fixed-Rate CMBS Index. Agency residential mortgage-backed securities (RMBS) represented by the Fannie Mae Current Coupon MBS Index. Non-Agency RMBS represented by the JPMorgan RMBS Credit Index. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment.

Agency RMBS: Attractive combination of quality and yield
In the agency residential mortgage-backed securities (RMBS) market, it’s all about relative value and risk. From our standpoint, why own a 5-year U.S. Treasury that’s yielding less than 4% when you can own U.S. government-backed agency mortgage-backed securities (MBS) yielding over 5.5%? The high quality, defensive nature of agency mortgages is appealing in today’s uncertain political and macroeconomic landscape. In addition, the combination of Federal Reserve (Fed) quantitative tightening, muted mortgage-backed securities (MBS) demand from banks in recent years and heightened interest rate volatility has left spreads at very wide levels by historical standards. Not only are spreads more than 40 basis points (bps) wider than long-term averages, they are also nearly 30 bps wider than BBB-rated corporates.

Agency RMBS: Attractive valuations vs. history and IG corporates

DISPLAY 2

Past performance is no guarantee of future results.

Source: Bloomberg. As of 6/30/25. Agency RMBS represented by the Fannie Mae Current Coupon MBS Index. BBB-Rated Corporates represented by the ICE BofA US BBB Corporate Index. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment.¹

Non-agency RMBS: Fundamentals and technicals underscore the sector’s appeal

Unlike agency RMBS, investors in non-agency RMBS are exposed to the credit risk of the underlying homeowner. However, the risk profile of this sector has dramatically changed since the Global Financial Crisis (GFC). First, lending standards have tightened significantly, and the risky lending that took place in the leadup to the housing crisis in the late-2000s is almost non-existent. For example, there are no more “ninja loans,” or those made to individuals with no income, no jobs and no assets.² Overall, credit quality is far superior in the non-agency RMBS market now, and this has led to relatively low levels of mortgage delinquencies.

Homeowner Equity & Mortgage Debt Outstanding

DISPLAY 3

Source: Morgan Stanley. National Association of Realtors. As of 3/31/25.

Meanwhile, home prices nationally have surged in recent years while mortgage debt outstanding has essentially flat-lined (due to many homeowners refinancing at historically low mortgage rates in 2020–2021), resulting in record levels of home equity. At the same time, the combination of constrained housing supply and persistent demand has elevated home prices.

To compensate investors for additional credit and liquidity risk, non-agency RMBS typically offer an additional spread pickup over agency RMBS (which we noted above are currently inexpensive compared with historical prices), leaving the non-agency RMBS sector trading nearly 20 bps wider than long-term averages.

Commercial mortgage-backed securities (CMBS): Selectivity will separate winners from losers
With generally higher yields and differing risk and return drivers relative to corporate bonds and residential mortgages, CMBS may be an attractive diversifier within a fixed income portfolio. However, the current environment has proved challenging for the sector:[1] Elevated interest rates and tighter credit conditions created headwinds on the broader sector, while rapidly changing workplace and shopping trends have pressured office and retail properties, respectively.

The highly idiosyncratic nature of the CMBS market, on both a sub-sector and an individual asset basis, creates a variety of opportunities for a skilled active manager to potentially add value or avoid risks. For example, multi-family residential properties have continued to deliver strong occupancy and rental rates, and industrial, storage and logistics properties have also performed well. While retail and hotel sectors have recently delivered solid performance, we believe that weakening household balance sheets amid a softening economy warrant caution in the space.

Asset backed securities (ABS): A tale of two consumers
The U.S. consumer has epitomized the strength of the U.S. economy in recent years, and household net worth has surged to near-record highs. While the headline data remains incredibly impressive, the story is a tale of two consumers. Upper-income brackets have performed extremely well since the pandemic, while lower-income consumer cohorts—which are much more interest rate sensitive—are beginning to show signs of stress. Not only are we beginning to see spikes in the rates of auto loan and credit card loan delinquencies, but the share of credit card accounts making only the minimum payment has also increased rapidly.

Share of Credit Card Accounts Making Minimum Payment

DISPLAY 4

Source: Federal Reserve Bank of Philadelphia. As of 12/31/2024.

The combination of fundamental concerns and relatively expensive valuations may signal woes for traditional consumer ABS. However, business-oriented ABS appear much more appealing due to meaningfully wider spreads. Securities such as mortgage servicing rights (which are closely linked to strength in the U.S. housing market) and data center ABS (which are benefiting from the increased adoption of artificial intelligence, among other factors) are two segments that appear particularly attractive today.

Bottom Line: In today’s securitized markets, yields are high and spreads are wide relative to history, creating some potential attractive investment opportunities, especially for a flexible, actively managed approach.

¹Diversification does not eliminate the risk of loss.
²“Ninja loan” is a slang term for a loan extended to a borrower with little or no attempt by the lender to verify the applicant's ability to repay. They were prevalent before the 2008–2009 financial crisis.

Mortgage & Securitized Team

The Mortgage & Securitized investment team offers combined experience analyzing the collateral within U.S. government agency and non-agency MBS markets as well as identifying opportunities for investing in securitized markets across a global spectrum of securitized assets in order to capitalize on potential value opportunities.

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Index Definitions

The Bloomberg U.S. Aggregate Bond Index, often called "the Agg," is a broad benchmark representing the investment-grade, fixed-rate, taxable bond market in the U.S. It includes a wide variety of bonds such as Treasurys, government-related securities, corporate bonds, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

The ICE BofA US Fixed-Rate ABS Index tracks the performance of fixed-rate, U.S. dollar-denominated asset-backed securities (ABS) publicly issued in the U.S. domestic market. The ICE BofA US Fixed-Rate CMBS Index is a benchmark that tracks the performance of U.S. dollar-denominated, fixed-rate, commercial mortgage-backed securities (CMBS) publicly issued in the U.S. domestic market. The ICE BofA US BBB Corporate Index tracks the performance of U.S. dollar-denominated, investment-grade corporate debt publicly issued in the U.S. domestic market, specifically focusing on bonds rated BBB.

The Fannie Mae Current Coupon MBS Index tracks the performance of mortgage-backed securities (MBS) issued by Fannie Mae that have coupon rates close to prevailing market interest rates at the time of issuance.

The JPMorgan RMBS Credit Index is a benchmark index that tracks the performance of a portfolio of Residential Mortgage-Backed Securities (RMBS).

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