The ABS, CMBS, and non-agency markets continue to set primary issuance records post-GFC over the past three years.
What the Data Reveals About Consumer Health
Much of the story around securitized credit really is driven by the consumer. You can think of that as being twofold. One, the broader consumer exposure to both consumer receivables as well as household balance sheets and residential mortgage credit. Additionally, when you think about that in a more concentrated format in ABS, approximately two-thirds of the ABS outstanding today are backed by consumer-related receivables.
As highlighted on the chart, the top line on this graph is often cited as being one example of how consumer stress is building throughout the system. It's the Federal Reserve's 90-plus-day serious delinquency rate for auto loans.
We think a better metric is to think not about the overall level of potential distress and delinquency, but the rate of change in delinquency and the flow of borrowers into more serious delinquency buckets.
As you can see, despite that top line headline level increasing steadily over time, we've seen a much more gradual increase in the contribution or flow into serious delinquency of loans, and it has remained much more stable for the past two and a half years.
Record Issuance Across ABS, CMBS, and Non-Agency RMBS Markets
The ABS, CMBS, and non-agency markets continue to set primary issuance records post-GFC over the past three years.
On the CMBS side, you've had a consistent unfreezing and normalization of financing markets and the capital markets' willingness to finance commercial real estate in the wake of the 2023 regional bank crisis.
Then finally, on the non-agency RMBS side, we've consistently, post-GFC, maintained fairly tight lending standards, in particular from the GSEs, the government-sponsored entities. Those tight lending standards, in addition to a shift of the GSEs away from financing things like smaller investment properties, have led to a growth in the opportunity set for private label originators and securitizers to be able to use securitization and the non-agency RMBS markets as a financing solution.
Securitized Credit Benefits: Yield, Duration and Portfolio Diversification
There's a couple of different benefits that securitized products offer. One is typically a yield advantage relative to comparably rated investment grade or non-investment grade corporate credit. Additionally, the securitized products markets have a shorter duration profile, which makes them less sensitive to movements in interest rates out the yield curve.
Securitized products markets also typically offer a diversification benefit. It has historically exhibited lower correlations of excess returns relative to other fixed income instruments.
Decision Points is a new video series that looks at the data driving fixed income markets. Bringing together views across Neuberger’s Fixed Income Team, these perspectives offer a closer look at the opportunity set across public and private markets.
In episode 4, Jose Pluto, Portfolio Manager, Global Securitized Products Team, looks beneath the consumer headlines – examining what’s driving strong issuance and exploring what securitized credit can bring to fixed income portfolios.
Three key takeaways
- While headline auto loan delinquency rates have risen, the flow of borrowers into serious delinquency has been relatively stable over the past two and a half years, offering a more nuanced view of consumer health.
- Issuance across asset-backed securities (ABS), commercial mortgage-backed securities (CMBS) and non-agency residential mortgage-backed securities (RMBS) has continued to set post-global-financial-crisis records over the past three years.
- Securitized assets can offer higher yields than similarly rated corporate credit, often with shorter duration, along with potential diversification benefits from historically lower excess-return correlations with other fixed income instruments.
