Mortgage-backed securities
December 2024
- Our mortgage-backed securities (MBS) strategy targets a lower duration through various interest rate hedges
- We feel that there is higher potential for spread tightening in seasoned non-agency RMBS that we hold
- Even in a macro risk-off scenario, consistent homeowner payment history and the low loan-to-value on the mortgages should mean cashflows are relatively unaffected
1. What do you think could be the biggest challenge or opportunity for clients in 2025?
For fixed income investors, the combination of potential US policy changes and various economic factors such as inflation uncertainty is causing an increase in interest rate volatility which presents a challenging investing environment for 2025. Our mortgage-backed securities (MBS) strategy targets a lower duration through various interest rate hedges, which allows us to capture the attractive spreads offered in residential mortgage-backed securities (RMBS) while reducing the effects of interest rate volatility on performance.
2. What do you see as the one major investment opportunity for you in 2025 and how can you capitalise on it?
Credit spreads, especially in US corporates, are on the tighter end of the historical range. In US RMBS, while spreads tightened in 2024, they are still wider than pre-Covid levels, particularly in the seasoned non-agency RMBS that comprise the majority of our MBS strategy. Given the attractive relative value of US RMBS versus other credit sectors, we feel that there is higher potential for spread tightening in the types of securities we hold in the strategy in 2025, thereby increasing the return potential due to capital gains in addition to the current yield.
3. What is the biggest risk to your asset class next year and how can you mitigate that risk, or even turn it into an advantage?
We believe that the biggest risk to our strategy is general spread widening. Non-Agency RMBS is a spread product and if there is a macro risk-off scenario, then spreads in this sector could widen as well. We are less concerned about the underlying cashflows, because if there is a deterioration of global economic health due to worsening macroeconomic conditions, we believe that the cashflows in the seasoned non-agency RMBS should be relatively unaffected given the consistent payment history of the homeowner and the low loan-to-value on the mortgages. In addition, over 95% of our strategy consists of senior securities in the capital structure which should mitigate credit risk due to economic factors.
Chien-Chung Chen co-manages the mortgage-backed securities strategy at GAM Investments.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.