Mortgage Backed Securities – Tom Mansley

What were the major recent events and impacts on your asset class?

Well, the most significant events of the second quarter were, first of all, the Federal Reserve (Fed) pausing in its interest rate rise program – we think that they're almost done, but not quite, so there'll be a little more left to do to the sticky inflation and more specific to our strategy, the stabilisation of home prices in the United States. Home prices were up again the prior month, which brings them to relatively flat on a 12-month basis and only down about 2% from the absolute peak back in June of 22, which is consistent with what we've been saying and what we continue to think, which is that the rise in rates causes an affordability problem that's going to push prices down slightly. However, there is a tremendous amount of demand, very little supply, and that's going to dominate the medium to long term. And that's why we're seeing the stabilisation after even such a mild decline and we think that we're back into that nice, stable home price zone again.

What can your asset class offer in the current environment?

Well the asset class tends to generate very stable underlying cash flows. In general, the portfolio composition that we have today, which consists of very seasoned mortgages, makes that even more so. So, the really stable underlying cash flows in a time of potential instability, which is where we are today and across various financial markets, means that this asset class can provide that low vol, nice yield, the stability that a lot of people are looking for and in a non-correlated manner versus other assets.

What is your outlook in the near and medium term?

The outlook is that this is a very good time to collect yield. The portfolio today yields in excess of 7% and we're going to be very happy to collect that yield, particularly since we're able to do that with a very conservative portfolio. And when I say that, what I mean is we're not concerned about recession potential or anything of that nature because the very seasoned nature of the underlying assets means we have a very high house prices versus the purchase because the purchase was 15 years ago. Also, the loan amount is much smaller today, so the loan is secured by a very high value asset. Also, the borrowers have that demonstrated ability to pay and they have been doing so through prior recessions such as the Great Financial Crisis. Put that together with the fact that over 95% of the portfolio is the most senior claim in the capital structure. So we have a lot of senior bonds in the portfolio, which means you are first in line to get all of your principal, all of your interest. That's the kind of conservative portfolio we put together, which means I think it's time to collect some really good yield.