Non-Agency Mortgage-Backed Securities (RMBS) are Structurally Attractive and have Favorable Market Technicals
by Semper Capital, on Mar 24, 2021
RMBS securities are often attractive for several structural reasons. First, many “next generation” deal structures – bonds issued in the last few years – are designed to deliver quickly as monthly principal payments (from prepays and amortization) pay down senior bonds and leave more credit support for the deal’s remaining bonds. This often leads to credit ratings increases and spread tightening over time as credit support improves. This “roll down effect” also reduces interest rate sensitivity as bonds get closer to their principal windows. The fact that these bonds are normally fully amortizing provides a structural advantage versus CLOs (during their investment period), CMBS (Commercial Mortgage-Backed Securities), high yield and investment grade corporate bonds, which generally must be refinanced at maturity – this refinancing risk can have negative implications in a rising rate or recessionary environment.
These structural advantages have played a role in price stability over the last several weeks as interest rates have risen sharply. The 10-year Treasury yield has risen from approximately 90 basis points to 1.70% as of March 19th. However, most RMBS, except for the longest effective duration bonds like RPLs and the longest spread duration bonds like Agency CRT subordinated bonds have avoided price the price volatility present in the Treasury, Agency MBS, and Corporate sectors.
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