Securitized Credit Market Update

• Tariff Sheriff and DOGE: Now the dominant force within markets, policy actions by the new administration are volatility-inducing, with important implications for geopolitics, Fed policy and economic growth. In our last talking points (2/18), we highlighted tariffs as a ‘new’ macro input, but discussed how dismissive markets were of the initial policy salvos, in part because delays had been granted. One month later, trade wars have deepened with our major trading partners, and more are pending in early April. Layering in ambitious job cuts orchestrated by DOGE (note that estimates vary widely), the collective severity of policy action has surprised market participants while offering no assurance a ‘Trump put’ is anywhere close to reaching its strike price.
  • As the sell-off deepened, securitized markets picked-up some of the beta in broader markets, although direct fundamental feedback loops aren’t apparent. Ultimate inflationary and/or growth impacts may be in the offing, but these remain highly uncertain with only indirect impact on collateral pools across sectors. We link spread moves (see below chart) as correlated to the sharper and now more sustained widening moves experienced in corps. This is further evidenced by the lack of any material credit curve steepening that would likely be on display if credit fears were to get priced into our markets.
• US Labor and CPI: Dismissed by markets as covering pre-policy periods in February, payrolls and CPI were not a source of volatility in markets, despite signals that otherwise may be interpreted as soothing for risk takers. The headline payroll # was close to consensus (+151K vs +160k expected) and the unemployment rate increased a tick (now is at 4.1%) - neither too hot nor too cold. CPI retreated, with the headline and core both posting downside surprises: headline +0.2% MoM vs +0.3% expected and core +0.2% vs +0.3% expected. In each case, market reactions were modest and short-lived relative to policy induced volatility described above.
  • Securitized markets had little to price after these reports, with market discomfort based on more forward-looking implications from above-described policy uncertainty. We note that this hard data likely will keep the Fed on hold and with ‘hawkish dots’ at their March meeting, not ideal for CMBS and RMBS where weaker associated refi impulses keep transaction de-leveraging on the slow side.
• Fed: No Fed meeting since our last note, although one is on tap for this Wednesday, 3/19, as alluded to above. There has been an array of Fed speak, but this has all been overshadowed by the Tariff Sheriff and DOGE. The meeting will get better market focus, particularly given updated Dot Plot and economic projections.
  • Securitized markets (like other risk markets) prefer a dovish tone but are resigned to receiving a hawkish message in light of previously highlighted inflationary and growth dynamics received so far. Remember, a continuation of the ‘higher for longer’ policy rate narrative is positive for yields, in particular floating rate and short duration parts of securitized (CLOs, CRT, ABS).

• As is mostly evidenced in the spreads table, securitized markets have traded wider since our last update. As alluded to, this apparent regime shift has been driven by the volatile macro backdrop, led by equities, which briefly entered correction territory. Correlations have increased across risk markets and securitized sectors have not been immune.
• CMBS has underperformed other securitized sectors, although all sectors have seen spreads widen against the more volatile market backdrop and liquidity is more expensive for those looking to maneuver.
  • We have noted that the -49bps rally in rates (10yr from 4.79 on 1/14 to 4.3 on 3/14) is a definitive ‘good guy’ for credit risk in CMBS, as it reduces refinancing risk for maturing loans.
• Generally, the spread moves have been parallel across the capital stack, with the only measurable credit curve steepening in CLOs. We have even noted some credit curves flattening (subprime auto ABS!). We interpret this as signaling the lack of direct feedback loops into credit behavior of securitized collateral pools from the policy uncertainty impacting other risk markets.
• From a buyer type perspective, total return oriented buyers (money managers, hedge funds) have pulled back in this sell-off, particularly in new issue transactions, driving spread widening as new deals continue to get executed. While insurance investors have tended to be a consistent buyer (the most?), ‘slower’ interest in certain sectors (non-agency RMBS most recently) have been highlighted in market conversations.
  • This has made sectors with particularly heavy issuance more vulnerable, like CMBS which has experienced the largest year-over-year increase across securitized sectors.
  • Post industry conference pockets of particularly heavy issuance (ABS, non-agency RMBS in particular) have also exacerbated spread widening initially catalyzed by the macro backdrop.

• A regime shift in US risk markets – away from US exceptionalism powered by consumer resilience and AI related corporate spending, and into a less certain outlook for economic growth – appears to be under way.
• The duration of this environment, otherwise negative for credit spreads and excess returns, is highly uncertain with potential powerful policy pro-growth forces (deregulation, tax cuts, less ‘crowding out’ and lower yields) still in the medium-term mix.
• As we iterated last month, focus is a challenge with the volatile backdrop (every week ages us a year!) but ultimately is key. Much of the news has minimal direct impact on securitized markets, even if unsettling on the macro scene, so the largest dislocations that emerge may prove the greatest opportunity.
• Our more traditional pillars for investing (collateral, structure, parties involved, rel-val) continue to reflect supportively as we progress through the year, so it is important to not miss opportunities as they arise. This is particularly the case in primary markets where robust issuance plans may present great opportunities when liquidity is stretched, assuming one’s underwriting remains focused and sound.
• Lastly, as promised we returned safely from our industry conference a couple of weeks ago and we compiled some notes that we are happy to share. Enjoy and let us know if you have any follow-ups.

Voya Securitized Team