Securitized Credit Market Update

Going to use the new year as an occasion to switch up the format of the talking points, try to organize the content a bit more for our reader(s). Hope this lands satisfactorily. We welcome feedback!

• Fed: Since our last update, the Fed has arguably been the biggest driver of market moves, eclipsing (at least partially) the new administration. They delivered another 25bps cut (100bps in total, 4.25-4.5% target policy rate) at the meeting (12/18), in line with expectations. However, the market was extremely disappointed with the accompanying guidance, which indicated fewer as well as a slower pace of cuts into the new year. The ‘higher for longer’ narrative quickly got priced, ultimately driving a pronounced bear steepening in rates into the next slate of data in January. Risk markets were similarly displeased, equities and fixed income markets trading with decidedly more chop post Fed. 
  • We liked it for parts of securitized (CLOs, ABS) as it reinvigorated yield potential for these short/no duration sectors. In mortgages (commercial and residential), higher for longer hurts refi potential, slowing transaction de-leveraging and alpha from faster ratings upgrades. 
• US Labor: Payrolls went out strongly in 2024, posting +256K new adds on top of November’s +212K result. The unemployment rate also ticked lower (-0.1% to 4.1%) to fill out a refortified labor market backdrop. While regarded positively on some levels, the overall reaction in markets was negative, with good news being bad news, fueling the push higher in rates as the key culprit. 
  • We liked it across securitized sectors, as consumer incomes are the lifeblood for fundamentals in the economy broadly as well as debt instruments our ABS and RMBS markets finance. 
• CPI: The salve the market needed: a 0.1% reduction in the month-over-month core CPI for December, which dropped from +0.3% to +0.2%. The ‘everything rally’ we came to know and love in Q3 and beginning of Q4 came back since the 1/15 print, pushed equities higher, credit spreads mostly tighter and rates lower. 
  • We also liked this report, as it relieved some of the bear steepening pressure in rates and, consequently, broader risk markets which had been buckling under the rate pressure.
    • While securitized credit sectors tend to be less correlated, a sustained move in either direction (in this case lower values) can drive us to pick up correlation/beta

As is mostly evidenced in the spreads table, securitized markets have traded tighter since our last update, led by a continuation of the repair in CMBS and a resurgence in affinity for floating rate risk with CLOs:

The overall constructive backdrop for economic growth has helped support risk taking more broadly in securitized, allowing non-Agency RMBS to participate as well as subordinate classes across the ABS universe. 

• We have seen non-agency RMBS collateralized by low coupon collateral pools show small amounts of spread widening as the higher rate backdrop keeps duration profiles extended. 
• In ABS, the ‘January effect’ has seemingly taken a pause as accounts conducted elevated selling in the secondary market in the last few trading sessions, pushing spreads wider in senior classes of various sectors.

Before we close the book on 2024, it is worthy re-iterating how substantial issuance volumes were in securitized credit. Credit sectors saw close to $750B in total issuance, with ABS setting an all-time high and CLOs a top 2 year in its history.

• This is particularly impressive given the high-rate backdrop that worked to restrict new collateral creation in mortgage sectors, where refinance mechanisms were muted. 
• While fatiguing at times, this level of activity reflects well on the space in terms of its depth, breadth and overall health. We expect this to build upon itself as a virtuous cycle of sort takes hold between issuers and investors in 2025.

In terms of the start to the year, issuance has been comparatively slow versus last year, excepting the solid start for CMBS. However, we do not extrapolate this any further into 2025… the deal pipelines are large across sectors, and we expect meaningful volumes to add to the tally and do so on a sustained basis.

• Looking forward, we expect to spend more time strategizing around actions taken by the recently inaugurated new presidential administration. Just 2 days in at the time of writing this, we have seen dozens of executive orders and only begun to process market reactions. 
• However, our more traditional pillars for investing (collateral, structure, parties involved, rel-val) all flash optimism for the new year and the opportunities that will be available near term as supply picks up into freshly higher yields. 
• Lastly, the CREFC conference was last week, a usually well attended event that sets the tone for CMBS each year. While attendees lamented the difference in credit spread compensation from where things were at last year’s conference (!), we judged the tone as optimistic with investors seeking risk and issuers with plans to tap it across a range of property types and sub-sectors. We have some of our more detailed observations chronicled, so don’t hesitate to reach out if you’d like to see them. 

Stay warm and let us know how we can be helpful this year. 

Voya Securitized Team