RMBS Sector Today and Recent Trends
by Semper Capital, on Aug 10, 2021
The RMBS sector today can be characterized by its 3 pillars of value:
- High current yield – most RMBS pay monthly interest and principal, and are fully amortizing.
- Low interest rate sensitivity – many RMBS have floating rate notes, short average lives because of expected principal paydowns, in some cases negative durations, and even coupons that increase if bonds aren’t called. In an environment of rising interest rates, these characteristics can protect bond prices.
- Low correlation to other asset classes – the duration, credit, and optionality characteristics of many RMBS combined with the bespoke and complex nature of the sector have historically resulted in low price correlation to investment grade bonds, high yield bonds, Agency MBS, Treasuries, and equities. This can result in valuable diversification in volatile markets.
We have realized continued price recovery, dating back to last April, and expect this to continue on a go forward basis across most RMBS, especially mezzanine profiles. At the same time, credit quality continued to improve across RMBS sectors, leaving room for additional spread contraction and price appreciation. We believe RMBS 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. The U.S. housing market which underpins RMBS has gotten even stronger over the course of the year as measured by home price appreciation and subsequent increase in home equity, demand in excess of supply, and credit quality of borrower. Combined with the low interest rate sensitivity of most RMBS and low projected net supply, RMBS has become an increasingly attractive value proposition.
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.