Non-Agency RMBS Sector Outlook
by Semper Capital, on Feb 26, 2021
The Non-Agency Mortgage-Backed Securities (RMBS) Sector is well positioned for strong performance moving into 2021 and Semper believes it offers both an extremely attractive absolute and relative value opportunity compared to other U.S. fixed income sectors. The price recovery for much of this sector, following March’s pandemic-induced liquidity event across the capital markets, has lagged other momentum-driven and Fed-supported sectors. At the same time, the U.S. housing market which underpins RMBS has been one of the strongest performing sectors in the economy with headline data continuing to strengthen through 2020 year-end. This has created an increasingly attractive value proposition coming into the new year which sets up RMBS for a strong 2021.
(1) Strong housing fundamentals
The opportunity set is being driven by:
(2) High quality borrowers and mortgage loans
(3) Structurally attractive characteristics
(4) Favorable RMBS market technicals
The combination of a strong credit backdrop (reinforced by ever improving top down and bottom up metrics), an asset class in which the securities have structurally attractive features and favorably trending market technicals all contribute to the value we are seeing in the markets.
Senior, investment grade bonds across most sub-sectors within RMBS have retraced much of their spread widening and price declines, but many pockets of mezzanine and subordinated paper remain much higher in yield and lower in price when compared to pre-pandemic levels. A number of factors have contributed to this phenomenon:
- Structural and credit complexity of many of these bonds and experience/data/cost barriers to entry
- Lack of direct Fed support, increasing perceived risk early in the pandemic
- Reduction in leverage utilized by a swath of RMBS market participants, led by mortgage REITs
- Tendency for Non-Agency RMBS price moves to lag momentum driven markets like corporate credit
We expect further credit spreads contraction and price increases across RMBS sectors in 2021 as a result of continuing fundamental strengthening combined with reduced uncertainty by way of vaccinations, post-election stimulus, and continued curing of pandemic related delinquencies. We expect mezzanine and subordinated profiles to perform best as we recapture last year’s lagged price recovery. This will likely result in attractive performance relative to other fixed income sectors that have already fully recovered to pre-pandemic levels and beyond, in many cases without the fundamental credit support that RMBS enjoys today.
Opinions expressed in this document represent the views of Semper Capital Management, L.P., are valid only as of the date indicated, and are subject to change without notice. There can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or thereafter. We are not soliciting or recommending any action based on this material. The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities.
®Semper Capital Management is a registered trademark.