Mortgage-backed securities (MBS) remain an attractive investment proposition thanks to their low volatility profile, which beats other medium and high-quality fixed income securities over time. Much has changed since 2009, and informed investors are capitalising on the income stream the asset class offers.
On a national basis, US house prices are still 5.6% below their peak in April 2006. The GAM team anticipate prices starting to stabilise soon, following a 5.0% year-on-year increase according to Case-Shiller data, with only very modest increases in the foreseeable future.
Looking at credit, the quality of the housing market continues to improve. The number of houses in foreclosure at the end of August was down 29.6% from the same time last year. This represents 58 consecutive months of year-over-year declines, according to Core Logic. The percentage of mortgages in serious delinquency dropped to 2.8% of all outstanding mortgages in August – the lowest delinquency rate since September 2007.
GAM’s Gary Singleterry comments on politics: “Aside from market fundamentals, which are positive, there is much hype around the political situation and the uncertainty of the election outcome. But irrespective of who ultimately wins, we believe that homeowner credit should remain benign, house prices to have strong support and economic conditions to remain solid. Absent an exogenous event, we do not foresee any major changes to the market, whoever ends up in The White House.”
On Brexit, the team remain unruffled. “While the extraction process will take a long time to complete, the economic impact could come sooner. But we do not foresee the referendum result having a direct impact on the US housing market; any subsequent moves in rates by the Fed will be few and small by historical standards, with the intent to minimise the impact on financial markets”, added fellow GAM manager Tom Mansley.
“Given the expected gradual normalisation of US interest rate policy we remain comfortable focusing on the non-agency market, where credit conditions are still attractive. We continue to favour non-agency bonds over government guaranteed agency securities. Homeowner credit is still improving. Mortgage delinquency rates are on a positive trajectory, loss severities are declining and the employment picture is slowly strengthening. New home construction is still lagging historical norms and the supply of homes for sale is in balance with demand. We are also finding good value in multifamily-backed securities and in securities backed by small balance commercial loans”<\em> concludes Singleterry.