RMBS Relative Value vs Other Risk Assets and Fixed Income
by Semper Capital, on Apr 14, 2021
RMBS has generally been attractive from a risk-adjusted relative value standpoint since the GFC more than a decade ago, with higher current yield and greater total return opportunities than IG and HY corporate credit. Reasons include the persistent structural complexity premium, smaller size of the sector, over-the-counter nature of the sector, and barriers to entry into the sector including the importance of sector specific expertise. During the severe liquidity-driven economic and market dislocation in March 2020, RMBS prices fell as much or more than other risk assets, and then failed to recover as quickly for the reasons highlighted earlier, combined with the lack of direct Fed support. RMBS yields (loss adjusted) remain higher relative to the yields (nominal or gross) for other asset classes since the onset of the pandemic. Our view is that the strong structural and collateral fundamentals are undervalued as a result of this persistent price dislocation.
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