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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
In recent months, significant investor concerns have arisen around persistently high inflation, the specter of rising US interest rates, and the potential for economic and/or market disruptions from these risks. Geopolitical escalations in Russia and Ukraine have added yet another layer of complexity to financial markets and the macroeconomic environment. We’d like to highlight four key themes that we believe may support the securitized credit asset class against this challenging backdrop:
By way of historical context, we looked at recent US Federal Reserve (Fed) rate-hiking cycles to see how securitized credit assets have performed relative to other major fixed income sectors during rising-rate periods. In the absence of an all-inclusive market index to use as a proxy for the securitized space, we instead focused on various subsectors that we consider to be representative. As shown in Figure 1, the securitized subsectors generally performed well in rising-rate environments, producing positive total returns.
While credit spread levels have compressed meaningfully from those reached at the onset of the pandemic, we believe the securitized asset class continues to offer an attractive risk/return profile compared to many other fixed income spread sectors. Indeed, many securitized subsectors may benefit from rising inflation and interest rates in the coming months.
While the current market sell-off (driven by the Russian invasion of Ukraine) makes the entry point to the securitized asset class more attractive, we remain confident in its fundamentals. And from a longer-term strategic standpoint, we believe the asset class can play a structural, diversifying role in many investor portfolios.