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Now seems an opportune moment to provide an update on the securitized market— a fixed income sector that, in many ways, has been on the front lines of the ongoing turmoil in the US banking sector. However, as discussed below, our view is that not all securitized subsectors are equally vulnerable in this environment.
US Treasury yields have fallen, while credit spreads and global market volatility have risen, amid the recent challenges faced by a growing number of banks in both the US and Europe. As a result, March has been a tough month for many market sectors as of this writing, and the securitized asset space has been no exception.
Agency mortgage-backed securities (MBS) have been directly impacted by the crisis, making them one of this month’s worst risk-adjusted performers within the securitized space. Many smaller, regional banks have significant exposure to agency MBS and began to sell such securities as they experienced swift deposit outflows, which they feared would only accelerate.
The Bank Term Funding Program (BTFP) announced by the US Federal Reserve (Fed), which offers loans pledged to agency MBS or Treasuries at face value, has helped ease some of the concerns around MBS sales, allowing their spreads to partially retrace some of the recent widening. However, the uncertainty around this subsector remains elevated, even after preliminary government steps to stabilize affected institutions in both the US and Europe.
In contrast to agency MBS, securitized credit (non-agency RMBS, CMBS, CLOs, and ABS) constitutes a smaller share of most small regional banks’ portfolios, but these assets have not been immune from spread widening on the back of deteriorating liquidity conditions and a worsening macroeconomic backdrop this month. Moreover, the likelihood of increased regulatory capital requirements being imposed on regional banks is apt to adversely impact securitized credit broadly.
Yet it’s important to note that each securitized subsector carries different (and varying degrees of) risks from the current banking situation:
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