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Fixed income focus: Finding value in securitized credit

Margaret Steinbach Xavier Goss

KEY TAKEAWAYS

  • While an uncertain economic backdrop and building downside risks to the economy may weigh on risk assets broadly, we continue to find compelling opportunities within securitized credit markets that are more favorable than generic corporate credit exposure.
  • Securitized credit lends itself well to active security selection and offers compelling diversification, given the inherent diversity of the securitized markets and the breadth of exposure they provide to different parts of the economy.
  • Senior and select short-term mezzanine tranches of subprime auto ABS appear to offer good value, as their strong income profile provides opportunities to hold to maturity.
  • The CMBS market is broadly coping with “higher for longer" interest rates, which may put pressure on cap rates, but spreads should stay near current levels or tighten further over the short to medium term.

Once widely seen as niche and esoteric, securitized credit has evolved into a mature asset class that can allow investors to tap into differentiated income streams and broaden their risk exposure across fixed income markets.

 

Distinct from agency mortgage-backed securities (MBS), given they lack the implicit backing of the U.S. government, securitized (or structured) credit investments total around $4 trillion in assets and encompass four primary subsectors: commercial mortgage-backed securities (CMBS), non-agency residential mortgage-backed securities (RMBS), asset-backed securities (ABS) and collateralized loan obligations (CLOs).

 

Securitized credit can provide a compelling avenue for achieving steady income and diversifying risks within a fixed income portfolio. Broadly speaking, historical returns have been less correlated with the overall market (as represented by the Bloomberg U.S. Aggregate Index) than other high-quality credit sectors. Individual subsectors of securitized credit like CLOs and RMBS have also been shown to provide strong diversification within the asset class.

 

Securitized credit can offer substantial diversification in a broader portfolio

The heatmap visualizes the correlation matrix among a variety of financial instruments and indices. The chart lists assets including the S&P 500 Index, investment-grade (IG) and high-yield corporate bonds and securitized credit instruments, including non-agency CMBS (across different rating tiers), ABS, RMBS: CRT and CLOs (AAA and BBB tranches). Each cell in the matrix represents the correlation between returns from two indices, with values ranging from negative 100 to 100. A color gradient at the bottom of the chart indicates correlation strength, transitioning from light (weak positive correlation) to dark (strong positive correlation). The chart reveals several notable correlation trends among financial instruments and indices based on shading intensity. The chart highlights weaker correlations in lighter colored boxes, which are more common among structured credit products, particularly lower rated or more complex tranches, such as non-agency CMBS (BBB), CLO (AAA) and CLO (BBB). These instruments appear to behave more independently from the broader market and from each other, possibly due to their unique risk profiles, underlying asset structures and investor bases.

Sources: Capital Group, Bloomberg Index Services Limited, J.P. Morgan, S&P Dow Jones Indices LLC. Correlations from January 1, 2018, to May 31, 2025. Indices: S&P 500 Index, Bloomberg U.S. Corporate Investment Grade Index, Bloomberg U.S. High Yield 2% Issuer Capped Index, Securitized credit benchmark = 80%/20% blend of Bloomberg U.S. CMBS Non-Agency (ex AAA )/ U.S. ABS (ex AAA) Index, Bloomberg Non-Agency CMBS Index and J.P. Morgan. Investment grade (BBB/Baa and above).

 

As uncertainty weighs on the broader macro backdrop and markets, maintaining a flexible approach and having the ability to gain access to more segments of the economy will be essential in optimizing portfolio performance. By harnessing fundamental research, investors can navigate the complex landscape of securitized credit with confidence, capitalizing on unique opportunities across each subsector. We continue to find compelling opportunities within securitized credit markets that are more favorable than generic corporate credit exposure, where valuations remain relatively less attractive in aggregate.

 

 For more in-depth analysis, please download the full report below.

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Margaret Steinbach is the asset class lead for fixed income and oversees the team of investment directors in North America. She has 18 years of investment industry experience (as of 12/31/2024). She holds a bachelor’s degree in commerce from the University of Virginia.

XVG

Xavier Goss is a portfolio manager with 21 years of investment industry experience (as of 12/31/2024). He holds a bachelor's degree from Harvard. He also holds the Chartered Financial Analyst® designation.

S&P 500 Index: A market-capitalization-weighted index based on the results of approximately 500 widely held common stocks. This index is unmanaged, and its results include reinvested dividends and/or distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

 

Bloomberg U.S. Corporate Investment Grade Index represents the universe of investment grade, publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity and quality requirements. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

 

Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index covers the universe of fixed-rate, non-investment-grade debt. The index limits the maximum exposure of any one issuer to 2%. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal

 

Bloomberg U.S. Non-Agency CMBS Investment Grade Index (ex AAA) represents a subset of the Bloomberg U.S. Aggregate Index that includes eligible non-agency conduit and fusion commercial mortgage-backed securities deals, with a minimum current deal size of $300mn and a rating of BBB/Baa or above, excluding securities rated AAA. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

 

Bloomberg U.S. ABS (ex AAA) Index represents a subset of the Bloomberg U.S. Aggregate Index that includes asset-backed securities, excluding securities rated AAA.

 

Bloomberg Non-Agency CMBS Index represents a subset of the Bloomberg U.S. Aggregate Index that includes eligible non-agency conduit and fusion commercial mortgage-backed securities deals. This index is unmanaged, and its results include reinvested distributions but do not reflect the effect of sales charges, commissions, account fees, expenses or U.S. federal income taxes.

 

J.P. Morgan Collateralized Loan Obligation Index (CLOIE) is a benchmark to reflect the market for US dollar denominated broadly syndicated, arbitrage CLOs. The CLOIE sub-indices are categorized by six original rating buckets (AAA to B), three collateral manager bands by CLOIE debt AUM (Small AUM, Medium AUM, Large AUM), three origination periods (all vintages, post- and pre-crisis), and 11 Reinvestment Period buckets.

 

Credit risk transfer securities consist of loans purchased by government-sponsored entities (financial services corporations including Fannie Mae, Freddie Mac and the Federal Home Loan Banks created by the United States Congress to enhance the flow of credit to specific sectors of the economy, such as housing and agriculture) that are offloaded to the private sector without guaranteeing the principal and interest.

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