Strong Gross Supply and Constrained Net Supply

While it is expected that supply throughout 2021 will continue to pick up back to, and above, pre-COVID levels, the market is still recovering from the reduction of supply in 2020. As a result of the COVID crisis, origination temporary halted for certain sectors and the pace of new issuance in the RMBS primary markets dropped meaningfully by the second and third quarters of 2020. This led to an overall shortage of supply in the RMBS market in 2020 at under $100 billion gross supply vs $120-130 billion in the prior years leading up to the COVID crisis, according to a recent Bank of America research report. This reduction in gross supply, coupled with the rapid pay down of structures as a result of elevated prepayment speeds, led to a $30-plus billion decrease in net issuance in the sector (meaning a shrinking of the RMBS sector in 2020 by $30 billion). While issuance projections for the RMBS sector for 2021 range from $140 to $150-plus billion in 2021, which should contribute to a positive net supply this year, at best it still only corrects the imbalance of the negative net supply from 2020 in aggregate. On the demand side, as a result of the strong credit performance and housing data through the COVID crisis, deals continue to get strong traction in the primary market as investors including money managers, banks, REITs, and opportunistic credit funds look to add exposure to the RMBS sector. Overall the limited supply dynamic coupled with the strong demand from investors for RMBS credit offer a technical positive tailwind to the sector in 2021, which in conjunction with strong underlying fundamentals, can help provide a catalyst for further spread tightening in the asset class this year.

DISCLOSURES:

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.